The Weekend Trader - Trading an Edge

If someone new to trading were to ask me to sum up trading in one sentence, it might be: Find an edge -- any edge -- and then go into a secluded place and trade the hell out of it.

Now let's have some fun and dissect the two words highlighted:

Advance warning: I received some junk mail touting a trading "advisory service" the other day which again got my blood boiling, so vendors should change the channel now.

First, let's talk about "edge". One could easily argue that there may literally be an infinite number of trading "edges" out there. Yet I don't know about you, but I still get tons of junk mail -- both via the old fashioned USPS and email -- from services telling us they'll sell us their edge. Advisory services, chatroom horse race callers, subscription services ... you name it.

And while the volume of such "junk" has certainly declined since the sick daytrading hype days of the late 90's and early 00's where everyone from vacuum cleaner salesmen to former construction gurus suddenly became "experts" after learning a pattern or two, it's still out there and probably always will be to some degree.

An edge is of course simply statistical probability that scenario A will more likely occur than scenario B. Nothing more, nothing less. And at the risk of making the most obvious trading statement of the century, the industry hype touting any particular "edge" is simply marketing noise. Nothing more, nothing less.

All the fancy pattern names ... including one whose name suggests it's the end-all, be-all of patterns and could also cure cancer ... are also simply marketing. Umm, last I checked, no pattern provided 100% results. If I want to buy a truck, I can choose from hundreds of combinations of makes, colors, and accessories. You can call it a Toyota Tundra or a Dodge Ram. In the end, they're both just pick-up trucks. And a market pullback is just a market pullback ... do we really need to name it? If I want to buy Ibuprofen, I can choose from Advil, Motrin, Nuprin, and Medipren. Yet despite the fancy names and billions of dollars spent on marketing, they're all the same dang thing! Plus, the marketed "name brands" cost more to cover the costs of ... yup ... marketing.

There's a classic line in the first Shrek movie where Donkey jumps up and down while shouting, "Oh! Oh! Pick me! Oh, I know! I know! Me, me!" No need to continue the thought ... 'nuff said.

Now let's talk about the "secluded place".

OK, let's assume -- and hang with me on this -- that you've indeed found a bona-fide edge, hopefully through a quality education reinforced by experience. Or perhaps you even made the leap to "purchase" the edge from somewhere. Again, we'll assume the edge is legitimate.

The next head-scratching part is that some sellers then even go so far as to entice you to pay some sort of recurring "advisory service" or live "trade with me" subscription after you've been sold the initial edge. Huh??? OK, I made the first leap and assumed the purchased edge was bona-fide. But if selling the edge in the first place assumes we're uneducated (one could argue "stupid"), then does paying for a guide dog assume we're also blind? Even worse, this "value-added" ongoing subscription is sometimes justified as "necessary" so we can fully understand why the edge didn't work any given time because of X, Y, or Z. Or so the "analyst" can prove his/her greatness by screaming how they "called" the market. Duhhhhh, it's called p-r-o-b-a-b-i-l-i-t-y.

Back to our ongoing poker analogy, imagine buying a book that says pocket Kings are a good starting hand. (First, I hope you didn't pay much for that quality advice!) Then when we're indeed dealt Kings, do we really need someone standing over our shoulder telling us that we have them? And then listen to them explain why they were beat by pocket Aces a few times?? And pay them to do it??? Sounds like Sears trying to sell me a maintenance agreement on socks.

Yes, I've long been outspoken on this issue over the years and as a result have taken some heat from -- big surprise -- "analysts" a.k.a. "vendors". And I'll likely take some heat for today's diary post as well. One of the better recent blog debates on this topic appeared in the comments to the December Wish List Post. And my views remain opinion as always, so there's no right or wrong. Yet simply put, I detest any part of this industry that doesn't promote self-sufficiency or whose boiler room substance is based primarily on marketing. Always have ... always will.

Now before my inbox floods again, I'll repeat that there are quality educational resources and venues out there that can help reduce the costly learning curve that is an absolute necessity in this biz. They're probably the ones making the least amount of noise and are thus the toughest to find. And if you needed an initial push, find them, ask for their detailed current trading records (not phantom "call" records; rather bona-fide results reflecting recent market conditions that take into consideration fills, order execution, transaction costs, and the mental aspect), and learn from them. btw, my guess is the "edge" you discover is incredibly simple ... but that's a topic for another time.

And while some traders may indeed trade better in a group environment, if it were me, and if I chose to care more about developing confidence and a true lifelong feel for the market than non-income producing social networking or newsletter reading for a fee, I'd make advance plans to quickly leave the nest. If the service was truly legit, they'd be trying to help push you out the door.

Then I'd take that edge ... or any edge ... and trade the hell out of it.

My guess is you'll know what to do with Pocket Kings.

Enjoy the rest of your weekend.