Now that we have a clearer picture of what this edge or advantage is in trading, how do we search for it? Where do we find it?
When asked this question at trading expositions, the number one answer I receive is, “From the charts.” Chart patterns are an excellent visual source of potential edge. Remember our definition: one outcome occurring more than another outcome over a series of attempts. Any chart pattern using similar parameters that result in price movement in one direction greater than the other direction can be a solid source of edge. Here are some other areas where you can obtain or detect this advantage:
- Education—A trader's experience and knowledge in itself can provide an edge that results in more favorable outcomes over a negative outcome. There truly is no substitution for knowledge of the markets and perfecting your craft as a trader. This development is a continuous process, and there never is a graduation day as a trader. The markets continue to evolve, and the best traders, like most other successful people, continuously strive to develop and improve.
- Price movement—Chart patterns in its simplest form are price movements plotted in a visual form. Market price moves merely because of more buyers than sellers or vice versa. Price movements and even stagnant prices often forecast future movements in price that can produce a predictable direction, thus providing trader edge.
- Inflection points—For any given series of reasons, price tends to react at ...