Edge, Not Direction Is The Basis For Strategy

Oft times I am asked where a particular currency is headed. My usual answer – I am a short term trader and have little grasp on forecasting currency direction. Some are smarter and ask whether they should buy or sell a particular currency. My reply – both are acceptable, insofar as they have identified a buy edge or sell edge before jumping in.

Which brings me to the point – a trader does not trade direction, he trades the edge.

This is not to discount direction, but with crystal clear thinking, direction is just the result of an edge in action. (What about momentum? Momentum is a bit more complicated, and can be used as an edge or be a mere spectator by-produce. But more of that next time.) So a trader can buy the US Dollar or sell the US Dollar, it does not matter if he has identified a worthy edge when he buys or shorts the currency.

Normally when I develop a strategy, I identify the possible edges, and then construct the most proficient set ups I can to take advantage of those edges. Conversely, if a set up appears, I want to know if the edges are in high probability play. Some traders advise when a set up appears, one must take the trade regardless how he feels – since emotions can convolute judgement. By all means, if that works for you, go ahead. That edge may lie in success based back testing, position sizing, continuous trend run and so forth. Truly, there are many ways to successfully skin a cat. Knowing how unpredictable the market can be, I be a fool to claim otherwise, and am merely sharing what I know works for me. But whatever method a trader employs, he must always be able to see the edge in what he does.

This passage may appear fuzzy and incongruent to some. It is not by deliberate effort or accidental thinking that I wrote in such manner. Either the reader understands or does not. If he does not, then he requires more screen time and reflection – truly that is the secret of seeing where the edge lies.