What’s an Edge and How do I Get One in Forex?
It shouldn’t come as any surprise to anyone that if you want to win in forex trading, then you need to have an edge. But what exactly is an edge?
Trading System Edge
First, you have to have a forex system with a positive expectancy, not to be confused with a winning percentage, you simply want to win more money when you’re right than when you lose over the long term.
Take for example a system with an 80% win rate with a poor R:R ratio:
Win: $100
Win: $100
Win: $100
Win: $100
Lose: $500
This system is winning an impressive 80% of the time, but the average profit size is dwarfed by the average loss size resulting in a net-losing system.
How about we invert the above so that it only wins about 20% of the time, but has a great R:R ratio:
Lose: $100
Lose: $100
Lose: $100
Lose: $100
Win: $500
The above system is a profitable system, even though it only wins 20% of all trades.
Psychological Edge
Ok, so that’s how an edge can apply to your trading method, but what about when it comes to your psychological edge in the forex market?
Well, first and foremost you must be able to follow the rules of your trading system with complete discipline. Failing to ignore the impulse of greed and fear will almost always have a detrimental effect on your account. If you can remove ego from the equation and trade your plan, you’re likely to achieve success in forex.
Risk Management Edge
What separates winning traders from losing traders? The way they manage their risk! Often, new traders bet randomly best on their opinion of how certain they are of the trade being a winner. If a trader bets 10% of their total account capital per trade and loses five times in a row, they’re 50% down, which means they need a 100% return just to get back to break even. One of the most significant things that will determine success in trading is determining position sizing and where you place your stop loss.
If you limit your risk to 1-2% of your total equity per trade with a winning method, and you follow that method with discipline you will uncover your edge in the markets, and become successful at Forex trading.
