Trading Academy

A Trading Edge

by Nick Katiforis

After having interviewed many of the world’s best traders, Jack Schwager concludes in his best selling book, ‘The New Market Wizards’ that:

“you can’t win without an edge, even with the world’s greatest discipline and money management…and if you don’t know what your trading edge is, you don’t have one.”

As a professional floor trader, trading futures on the All Ordinaries Share Price Index (SPI), I knew exactly what my ‘trading edge’ was. It was the ability to see the ‘order flow’ (the buy and sell orders coming into the pit and who was buying and selling), the speed of execution of my orders, and low transaction costs.

What’s Your Trading Edge?

There are many people that trade stocks, options and futures. Of these only a small proportion use an edge when trading. The lack of a trading edge, along with poor money management and insufficient capital, is the main reason why unsophisticated traders generally lose money trading in financial markets.

The key then is to find an edge, apply it and use correct risk and money-management techniques.

Using options you will learn how to trade when the odds are most in your favour, and just as importantly when to stand aside where the odds do not favour you. By doing so you will give yourself the best possible chance of success.

But my System is my Trading Edge

There are as many trading systems in existence as there are traders. Obviously no one would trade a system if they didn’t believe that it provided them with some sort of ‘edge’. If you use a system and believe that it does give you an edge, why not trade options when the circumstances are right to further enhance your edge.

The idea is to get as many factors going in your favour as possible before placing a trade. By doing this you give yourself a much greater chance of success in the long run.

Of course there are still no guarantees with any form of trading against losses. However compared to the majority of people who know nothing of these concepts, and who trade without an edge, you can’t help but have a better chance of succeeding in the long run and of reaching your financial goals.

These are the four most important principles of option trading that you will learn to apply in your own trading to gain a trading edge:

  • Limited Risk
  • Time Decay
  • Volatility
  • Option Mispricing