Trading Edge vs trading edge

mountainI did an interview a week or so ago with Abraham Thomas, one of the co-founders of Quandl. I love doing interviews because a thoughtful interviewer makes me ask questions and think about things in a new way. (Stay tuned for some more insights from that interview, and I’ll share the whole thing when it is published on their blog.) Part of our discussion centered around the idea of having and maintaining a trading edge, and I realized that I may not have shared the full picture with my readers.

My work is heavily quantitative, possibly to a fault at some times. If I cannot nail down an edge in a tool or a pattern, I will not use the pattern in my trading. This is a conscious decision, because, if I have to choose an error (and, make no mistake, you do have to make this choice) I’d rather eliminate potentially useful tools rather than allowing useless junk to creep into my analytical process. When I’ve talked about trading edges before, I focused strongly on the mathematics: the easy way to explain this is that you, over a large set of trades, are going to have two piles of money–money you made and money you lost. At the end of that large set of trades, the pile of money you made should be larger than the pile of money you lost. In other words, you need to make more than you lose.

We can slice this many different ways, and dig into the tradeoff between win ratio and average win/loss size (the classic expectancy discussion), and we can expand it to be a benchmark for analyzing raw patterns, indicators, or setups. This is important work, and anyone trading should understand how to do it. But, it’s not the full picture. There are other parts of your trading Edge that might transcend the mathematics.

Trading is a high performance endeavor with parallels to professional athletics, chess, music, or any other pursuit where humans try to do something as well as possible. Many of these pursuits are competitive; to stand out from the crowd, we have to be better than the crowd. (This is so obviously true in trading.) In any high performance pursuit, the performer himself is critically important–you are perhaps the most important part of your edge.

What does this mean, practically? Well, here are a few thoughts that came up in the interview:

  • Do you take care of your working environment? Not that everything has to be perfectly ordered, but do you have a space and a time in which you feel comfortable and settled doing your work? At times, this might mean doing analysis in a noisy coffee shop. (I wrote a large part of my book in various Irish pubs.) Understand how and were you work best, and make sure your environment reflects this.
  • Do take care of your body? Do you walk regularly, or perhaps go to the gym? Is your diet a reflection of who you are and who you want to be? All things in moderation, but it’s hard to imagine performing at an elite level if all you are eating is junk food.
  • Do you have vibrant connections to friends, family, and professional colleagues? Are the relationships in your life additive and supportive? Are you finding a balance between solitude and social life? For different personalities, this balance will look very different, but both aspects are important.
  • Are you finding some time away from the markets? I’m very much in favor of obsession, and I think there’s great value in single-minded focus, but, at some point, it becomes detrimental. You must have a reason for existing outside of the markets, and you need a reminder that there is so much else to existence. Hobbies are good!
  • So much of this is about balance, and it is a subtle call to think about your own mental health. At times, therapy can help a trader out of some rough spots or over some humps, but there is also therapeutic value in a sunset.
  • What is your purpose? You can define this however you wish–for some, it is intertwined with questions of religion and deeper meaning, but basically this, perhaps the most important question, asks us to think about who, what, and why we are. Throughout history, the people who have accomplished great things–even if those things appear somewhat unremarkable (like surviving a period of profound hardship)–most of those people had some guiding star, some bigger sense of purpose. I have come to believe that one of the keys to a happy life is having this sense of purpose. What is yours?

Yes, the math is important. Having a trading edge is essential, and if you don’t have that then you can have everything else right, and you will still lose money. Maybe you will feel better about it, but you’re going to lose without that mathematical edge. However, applying that edge requires that you have an Edge–a constructive framework to guide all of your activities. We touch on aspects of this when we look at trading and performance psychology, but, I found myself wondering in this interview, if I was missing and not communicating the big picture to you, my readers.

So, what’s your Edge, and what are you doing to take care of yourself?



Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 5 Comments

  1. GSC

    Very good post. This causes me to think about what I am doing and am I really placing myself in the best position to succeed. Thank You Adam.

  2. Daniel

    My edge is learning from the Best Men and those 3 steps which I currently try to establish as routine:

    Preparation every day for the next (what might happen?).
    Observing, if my setups will appear.
    Wait a bit…then excute, but at a good price (accepting that I will not always get in).

    Then let the market play out using a very favorable risk-reward, which will allow me to lose on the largest part of my trades, without my ego/feelings being much affected (still practising though 😉

  3. Chris Sellers

    Thanks Adam,

    I’m intrigued if you have ever researched or used smart drugs (nootropics)?

    I’m thinking they could potentially be highly facilitative of the discretionary side of your trading approach, e.g. the racetams and the choline types to aid Acetylcholine, focus, attention (the caffeine in coffee is already contributing here – and I know you’re a devout coffee lover).

    The clinical research is still early and variable, however I’ve read many anecdotal positives and experienced them myself.

  4. Hector Sanchez

    Adam, I enjoy the way you approach topics, providing food for thought, making people think and be introspective.

    My edge is

    – Following my trading rules
    – Being comfortable that this is not a perfect science and allowing my self room for error.
    – Continuously working on the key element of my trading methodology “Discipline”.
    – Focusing on the process and perfect execution.

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