How to create a Trading Edge

Trading EdgeA trading edge in options trading can be described as a set of conditions that when used, give a higher probability of a trade will profit than not.

You can enter trades which are much more likely to be profitable than others. It all depends on the strategy you use and the probability of the option going in the money.

Even when you have an edge, there will be losing trades as well as winning trades. Trading with a high probability of success does not guarantee a winning trade. It only give your more chance of success. The first trade that you take which goes in to your favour in the could be a losing one. However, taking a series of trades in favour of your strategy is likely to result in trades that win.

 

The Popular Belief About Trading Edges

Many traders spend years trying a variety of methods. They may use time based charts, ticks based charts, volume based charts. They may set different indicators or use a variety of different indicator settings in an attempt to find the combination that gives them their trading edge

If your indicator is comes up with a buying signal, then this does not mean the price of the stock will go up, it means that it is more likely that the price is going up than going down in the current market conditions.

Once you enter the market with a trade, you are at the mercy of the markets. It is impossible to predict where stock price is heading too. The Stock chart may look good but the Market goes down, or the sector have had bad news, or people are disappointed and expected to get better results. And the stock may go down. Past results doesn’t give any guarantees for tomorrow prices. So, if to guessing the direction of a stock doesn’t work is there another way to create a trading edge?

 

How to find the Trading Edge?

When buying or selling option premium, the options near the current stock market price is the most likely to be profitable.  Sell options with high Implied Volatility. These options have enough premium. When volatility drops you have can make profit, disregarding the direction of the stock. Sell options which are out of the money they have a high Probability of Profit.

This is where a system or a strategy comes into trading. A strategy is a set of rules that you trade by and those rules are based on identifying an edge and then trading accordingly.

This means that it does not matter if the trade wins or loses, because if you trade with a strategy based on an edge, then your trading system will produce winning trades over time that will make up for the losses.

 

How Do You Get a Trading Edge?  

An Trading edge is a way to measure if your trading strategy will result in a profit when followed over a long period of time and many trades Develop a system by testing and validating ideas.

The goal is to use option trading strategies with high probability of success and with enough premium. We like to enter trades with a statically chance of 60% or more to be in the money. That means that at least 6 out of 10 times we make profit. The best way of trading is Managing Winners. When taking profit around 50% of maximum profit we rise our win rate over well over 80%.

 

Conclusion

We create a trading edge when we enter trades with enough possibility to make any profit. We stay small and trade often. When like to sell option premium and enter the right kind of strategy. We manage our winners early. By sticking to the trading plan we will improve our win rate and our portfolio will grow steadily.


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