How To Develop and Maintain Your Trading Edge

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Your Edge

What is a Trading Edge

A trading edge is an aspect/area of trading in which you are better than most others at, and which allows you to profit consistently from trading. It may not necessarily encompass merely a specific technique or fixed set of techniques, but may also include the approaches adopted to handle the technical, strategic and mental aspects of trading.

Most of this article is relevant to investing edge as well. There is a fine line between investing and trading, and sometimes the boundaries are blurred and overlapping.

Why do you need a Trading Edge

Without a trading edge, it would be difficult to make enough money from trading to make a difference in your life. This is because trading is a negative sum game – the players have a less than 50% chance of profits on average because of the fees imposed by the various middlemen (eg. transaction fees, holding fees, trading platforms, stock exchanges, financial institutions). Thus if you are an merely average player in this game, you have a less than 50% chance of making consistent profits.

Arguably, if you are trading/investing over the long term, the game becomes a positive sum game, where the average player has a more than 50% chance of profits. This is because of the effects of technological progress and efficiency gains in companies over time. However, you are unlikely to make life-changing amounts simply by banking on these effects.

How do you develop a trading edge?

There are 4 things you need to work on concurrently.

  1. Understand what drives asset prices
  2. Understand the methods to trade the markets
  3. Experiment to find out what works for you
  4. Work on honing your cognitive skills

1. Understand what drives asset prices

Understand how markets work and what makes stock/asset prices go up or down. A lot of information is already on mainstream media free, so a reasonable understanding can be obtained from websites and videos.

Do note that you would need to regularly measure a pulse of the markets by constant research, as market behavior changes constantly.

2. understand the methods to trade the markets

There are various instruments available to trade markets, for example regular stock purchasing, options, CFDs, Daily Leverage Certificates. And there are various ways to utilize them, either within themselves or in combination with each other. The characteristics of each method should be studied, for example one-time costs, holding costs, leverage, break-even point etc. In addition, it would also be good to know the expected pattern of results of each method (eg. buying options typically results in more losses of smaller amounts, but also wins of greater amounts).

An example of an analysis of trading methods can be found in my previous post here.

3. Experiment to find out what works for you

Basically, be like a mad scientist and try out many different ideas. Test out different instruments using different strategies across different asset classes. But please do it without bankrupting yourself in the process. Use demo accounts first, but if you find demo experience not useful at all, go with live accounts, but trade with small amounts first.

4. Work on honing your cognitive skills

Your cognitive skills are used to assimilate info, develop strategies, recognize patterns and trends, identify correlations and learn from experiences. With more honed cognitive abilities, you would have a higher chance finding an edge, and your edge would be sharper.

There are many ways to improve cognitive abilities. There is a good article on it here. Personally, I find that computer games involving problem-solving and monitoring/managing different data points are useful in this aspect.

How Long Will It Take To Develop A Trading Edge?

Like any other skill, it will take a lot of time and effort. You may have heard of the “10,000 hours rule” to master a skill. The truth is, there are a lot of variables affecting learning speed, and not everybody will take the same time to develop an edge. Some may take months, while others may take years.

Will I be able to Develop A Trading Edge By Copying A System/Approach Already Used By Other Traders?

It is unlikely for 2 reasons:

  • Your trading edge likely has to be customized for your own cognitive and personality traits
  • If a system/approach has been copied and used widely, it likely would lose its competitive advantage

It can still be useful to look at other successful systems/approaches. You can adapt parts of them to fit into your strategy.

How Long Will Your Trading Edge Last?

It really depends on how markets evolve and the nature of your trading edge. They can last for less than a year, or they can be effective even after many years. Markets do evolve, and it is unlikely that any trading edge can last forever. You can try to maintain its effectiveness over time by continually tweaking it to cater for changing market behavior. If tweaking does not work anymore, it would be wise to move on to find another trading edge.


Being able to develop and maintain trading edges is key to being a successful trader. It will definitely take a lot of work, but the end result will be worth it.

When you have developed your edge, it is important to stay humble and recognize that market dynamics can change anytime and render your edge useless. Conversely, if you have not yet developed your edge, just keep learning and trying different things, your breakthrough may yet come soon.

Good luck!