What Is Your Edge?

To trade you need an edge.  That is, a reason why you think that you can do better than the majority of the traders out there.  Your profit is their loss.  Your loss is their profit.  It is a zero sum game.

I am reading The Alchemy of Finance (Wiley Investment Classics) by George Soros.  He is one of the most successful hedge fund managers ever.  He started as a stock analyst, then started Quantum Fund with Jim Rogers.  His fund returned an average of 35% per annum for something like twenty years.  An amazing run.

He writes that his edge is his philosophical outlook.  He has a model of markets that he calls reflexivity.  An example of reflexivity that he wrote about twenty years ago, and we are living through right now,  is how the fall in collateral value reduces the loan values that banks hold thereby weakening the banks.  It is a downward spiral that the Federal Reserve is trying to reverse now by buying mortgage pass throughs to support their price and in that way shore up the banking system.

Jim Rogers has written several books, among them A Bull in China: Investing Profitably in the World’s Greatest Market.  His thesis now is that China is a growing consumer of all industrial commodities and though now commodities are falling in price like everything else, this is a long term trend that has many years to run.  So when prices of commodities fall, he is a buyer.  He doesn’t sell.

Bernie Shaffer trades options based on what the expectations of the market are.  He looks for stocks that the market has low expectations of and an event that might surprise to the upside and will buy calls.  Or he looks for stock market darlings which are more likely to disappoint.  Those he buys puts on.

A model of the world gives conviction.  You need conviction to succeed in trading which is an emotionally difficult job.  What is your model of the world?  Write it down.  Soros had one of his best years when he was writing The Alchemy of Finance (Wiley Investment Classics)
and writing about his trading as he was doing it.  Writing clarifies thought and you have to think clearly to trade well.

See which of the income trades on my free CD “7 Secrets to Make $1,000 Per Week Trading Options” resonates with you.  It will give you an edge.