Having an edge on the market is what separate winners and losers in the financial market. An edge is not a trading strategy but rules to guide you when dealing with market uncertainty.
Ever had of the saying "The House Always Wins"? This is said because the Casino's always have an edge against participants.Great example is the roulette wheel,the roulette wheel has 18 black numbers and 18 red numbers and 2 green numbers. Participants might think they have a 50/50 % chance of winning.What they don't realize is that in the long run they'll lose all the money they have to the Casinos. Example you bet on black, your probability of winning would be 47.3% (18/38) and the probability of the Casinos to win would be 52.7% (20/38). The Casinos edge is 5.4%. This means for every $1 bet the casino makes $0.054 (5.4%) for every $1M bet the casino makes $54000. This exactly the same thing within the financial markets but this time as participants we have to have an edge against the market.
Our edge would be determined by our Risk Management and position sizing. To have an edge against the market you would need a risk to rewad ratio of more than 1:1 which would be determined mined by your trading style. For example we trade trades with minimum risk:reward 1:3. This means for every $1 risked we make $3.An edge would be also determined by the accuracy of your system to predicting move of the markets. Say it is 40% accurate. Out of ten trades you'll win 4/10 and lose 6/10 trades.
This means overall for every $1bet you'll lose $6 (6/10) and win $12 ($3reward×4 trades) on(4/10).overall you'll have made a $6 profit even though your accuracy was low.This is what is called having an edge. We will then use position sizing to determine how much we risk per position which advisable would be 1%-3% of your trading so you may stay longer on the market and avoid drawdowns from draining your account. Thank you people have a good day and I wish you good luck on your mission to success.