Stocks & Commodities V. 30:13 (8-10): Know Your Edge by Larry Schmidt

Stocks & Commodities V. 30:13 (8-10): Know Your Edge by Larry Schmidt
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Know Your Edge by Larry Schmidt

Who Are You?

Knowing your edge means more than just knowing the rules of the particular trading system you use and executing them. Here’s how you can understand the personality of your system.

As difficult as it is for novice traders to understand the personality of a system, it is even more difficult to develop a trading plan that will help them succeed. Toward that end, a disciplined execution is only one of the first steps toward that goal. “Knowing” your edge means understanding how well the system performs in up, down, or sideways markets. Understanding it means that you know that certain systems should only be used in uptrending markets, while other systems are more profitable in downtrending markets. Some may perform well in one market and not another.

Understanding your system’s personality makes a huge difference in improving its profitability. A professional trader can enhance his or her performance by choosing the signals that a system generates by understanding current market conditions.

Measuring performance

One of the keys to knowing your edge is measuring performance under a host of market conditions. To explain, let me use a system that works well in nontrending markets. This daytrading system only trades the Russell 2000 and does not hold positions overnight. On average, it typically generates three to six signals each day. Figure 1 is an example of the performance of this system on June 13, 2011. The measurements track the performance of the:

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