Secret #4 - How To Maintain A Winning Edge

hand on chin It's often said that if you don't know your edge, you probably don't have one. In fact, one of the main reasons most people lose money in stocks is the lack of a reliable trading advantage.

Many traders do have an edge, yet they aren't sure what it is. The best way to resolve this question is to look closely at your personal style. Do your methods consistently place the odds of winning in your favor, or do you rely on "lady luck" to deliver profits?

- - - - - - - - Pages Index - - - - - - - -
The Five Secrets: Intro
How To Pick The Best Stocks
How To Pick The Best Stocks - Part 2
How To Win In Any Market
How To Enter & Exit at the Right Time
How To Maintain A Winning Edge
How To Control Risk
The Five Secrets: Conclusion

-- Know Your Edge

Your "edge" is made up of a combination of factors. While you can gain an edge through all sorts of elaborate methods and complex systems, it's best to keep things simple. The list below includes the most important elements:

~ Choosing the best stocks

~ Exposing hidden trends within your chosen time frame

~ Locating high probability setups

~ Applying specific entry triggers that confirm your expectations

~ Following an Exit Strategy to minimize losses and lock in profits

~ Controlling Risk

protractor -- Track Performance
Once you are confident that you know what makes up your edge, you have to find out how well it performs. To do this there are three things you'll need to track:

pie charts Win/Loss Ratio - The number of Winning Trades compared to the number of Losing Trades. For example, if you win six out of ten trades, your Win/Loss Ratio is 60/40 - 60% winners, 40% losers.

Profit/Loss Ratio - The amount of points - or dollars - in Profits compared to the amount of points/dollars in Losses. For example, if you win $1.50 for every $1.00 lost, your Profit/Loss Ratio is 1.50/1.00.

Cost Per Trade - How much you pay your broker for each completed "round trip" - in and out.

@ Many traders mistakenly think they need a huge advantage that gives them a very high percentage of winning trades. In fact, the opposite is true.

Your edge can be relatively minor - so long as it produces a consistent Win/Loss Ratio, AND your Profit/Loss Ratio is positive enough to leave you with a sufficient profit after deducting transaction costs.

A review of the top ten mechanical trading systems of all time revealed that the best winning rate was 57.5%, while several were less than 50%. The key to the success of these systems is that profits from the winning trades offset losses from the losers by a significant margin.

Trying to maintain a high Win/Loss Ratio usually results in taking small gainers too early, long before they can develop to full potential. This sort of "winning" has an extremely negative effect on the Profit/Loss Ratio.

money bag Understanding the relationship between Win/Loss and Profit/Loss allows you to find the balance that best matches your personal style of trading.

Whether actively trading or investing for the long haul, most profits usually come from a relatively few big winners. The remaining positions are made up of numerous small gainers and small losers.


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