The following is taken from our 1st Quarter Newsletter – TheSoundTrader Squawk

Search for a Trading Edge

A lot of traders spend years trying to find a derived systematic edge to beat the markets whether it is mathematical for arbitrage trading, algorithmic for systems trading or analytical for technical traders. Aspiring traders sacrifice a lot of time towards the pursuit of an edge without considering some of the pitfalls, one of them being that the markets are continually changing at every time scale. This means that backtested systems have limited value for future success, and that functioning profitable systems are destined to fail at some point when the market shifts behaviour on a large enough scale. The time invested in finding one of these edges is usually significant, and could be invalidated before the system even goes live. It is of course possible to find a derived edge, which is why institutions and proprietary trading companies invest significantly in developing trading systems. However they also have teams of people for continuously evolving the system, managing and supporting the live trading, and objectively monitoring and testing the system.

Buy Low Sell High

These institutional trading systems have an edge through sheer force; experience, money, technology and labour. What about the retail trader at home wanting to compete in the same market as the institutions? Well no matter how much markets change the fundamentals stay the same both for making money and market behaviour. Buy low and sell high, and size moves the market through the forces of supply and demand. A good read on this can be found in the No BS Day Trading blog articles: ‘Methodology vs. Psychology’ and ‘What’s it all About?’. It is easy to spend years (from personal experience) down the technical and economic route in finding a market edge, but more than likely you will find that your edge produces about a 50% probability of success in the end regardless.

It will likely take no longer than learning any other complicated skill such as tennis at a competitive level. It will also be easier to maintain this approach to trading as through constant exposure to the market at the basic level of price and volume data, you will be closer to the market and constantly adapting to the present market conditions. Learning to trade the market fundamentals of the order flow seems to be the method nurtured in prop firms around the world. Teaching traders to trade and adapt instead of having them find a system. The trader’s edge then becomes their adaptability and confidence in making the most of the market forces directly, rather than deriving a model for future predictions.
Once a discretionary trader loses all inhibitions day trading they tend to be able to perform at a level beyond any system. This is because buying low and selling high is really not that difficult, it is the emotional management that is difficult. Observe how your edge in reading the market is effected with more size than usual, or on the simulator versus a one lot, and you have a gauge of how emotionally sensitive you are to the market. Once you have cemented your edge interpreting the order flow in the market using just your discretion, you can then leverage that edge even further through performance enhancing techniques.

Trading Strategy or Trading Skill?

A lot of successful traders have very simple strategies. I have heard recently about a successful trader in a prop firm that roughly shoots for 1 tick with a 90% success rate, and a maximum stop of 6 ticks. Think about how often you could have taken 1 tick out of the market in a range or noise of about 5 ticks. The notion of a risk reward ratio greater than 50% is easy to sell and comfortable to aim for so we can be okay with being wrong more than right. These probabilities essentially relieve us as traders from the responsibility of being able to take more profitable trades than not. If your edge is the confidence of knowing you can nearly always grab one or two ticks at some point in the day’s range, even if you must sit through 6 ticks, then what is wrong with that? It is an eye opener of how we are lead down a path in trading usually without just feeling out a market for a method that produces results first. If a trader can learn to recognize size and have a feel for the flow of their market like most professionals do,

If you approach the markets with the patience, discipline and focus of a pro you will more than likely trade like a pro with some reasonable order flow understanding and enough experience. There is plenty of material out there on developing these psychological attributes, but maybe use some common sense before spending weeks and months studying books. It might also be helpful for you to talk to some Arbitrage compliance specialists before investing any money. It’s important that you take your time and do it correctly.

and of course you certainly aren’t focused like an athlete on the order flow. For PriceSquawk users there are some ways you can tweak your performance further.

Listen to the Market

Try listening with headphones, and even better noise cancelling headphones (as I have found recently). Our hearing is a valuable resource for listening to the idiosyncrasies of the market, but we are constantly listening to our entire environment as well as the market. Subconscious processes are always filtering out information we are likely to not need within our present attention. You can essentially free up a lot of these subconscious processes for tuning into the market instead with some good headphones. This obviously has the effect of tuning you completely into the market, which doesn’t need explanation of why that is a good thing. By getting into this audio market zone you are also utilizing your inherent ability to pick up and store audible market patterns that you can then recall at a later time with subconscious efficiency.
An example of the power of sound can be found in bats. Think of how a bat can entirely model its world through echolation (sonar) when on the move, pinpointing objects with enough accuracy to catch an insect in their wing without running into the tree behind it. While we are not as amazing as bats in this respect, our hearing and auditory wiring is quite similar and further advanced than our other senses for being aware of our environment. Realising this,

for increasing your trading edge. So I hope you keep on listening and exploring the edge listening can deliver to your trading. If you wish to give listening a shot then why not try a free 7 day trial.

If you have any thoughts on this post, or ideas on other ways for increasing your performance edge then please leave a comment.