Building Your Trading Edge

Without an edge, trading is gambling.

What is Edge?

• Positive expected value over time
• Win rate x Avg win > Loss rate x Avg loss
• Repeatable advantage

Edge Formula

Expectancy = (Win% x Avg Win) - (Loss% x Avg Loss)

Example

• Win rate: 45%
• Average win: $200
• Average loss: $100
• Expectancy = $35 per trade

Developing Edge

Step 1: Hypothesis

• What behavior will you exploit?
• Be specific

Step 2: Define Rules

• Clear objective criteria
• No discretion

Step 3: Backtest

• Minimum 100 trades
• Document results

Step 4: Forward Test

• Paper trade
• Compare to backtest

Sources of Edge

Technical Edge

• Price patterns
• Support/resistance
• Market structure

Psychological Edge

• Discipline to follow rules
• Patience to wait
• Emotional control