Saturday, February 20, 2016

What is a trading edge?

A trading edge is defined as a set of conditions which result in a net gain when used over a large number of trades.

Let us think of a casino. The gambler can win once , or can win many times. But, if he gambles for a long period of time, he is going to lose money because the Casino receives Rs 100 and pays out Rs 97. The Casino has an edge. In the long run, the edge will show itself resulting in a guaranteed loss for the gambler.

In trading, nothing is guaranteed. Yet, traders must have some idea that the trading strategies they use will have more gains than losses over a long period of time. That is the trading edge.

No single trade will provide you with information on your edge. A series of trades may be profitable or losing purely by chance. When you take a statistically significant number of trades then the trading edge should come in play.

If you have made just five trades in the  Nifty and all of them were profitable then that is probably by chance - a random event.

Suppose you trade a 100 times in the Nifty futures over one year. Now, 100 is a significant number of trades. If you make money after an year, then you probably have an edge.

All trading should start with an edge.

In the next post, we will examine how we can determine if we have an edge in trading.

1 comment:

Ravi Kumar said...

Nice information on share trading.....