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Every trader’s interpretation and definition of “edge” is slightly different. Even if 1,000 traders traded similar strategies and markets, they would all have different answers if you asked them what their edge was.
Edge is profoundly personal and incorporates psychological components along with physical trading, as unfortunate and an unstable psychology can undoubtedly sabotage a dealer’s edge and influence them to lose cash when they ought to have won. One feature of an edge on which all traders will agree is that it makes you money over time. Not on a trade-by-trade basis, but over hundreds, if not thousands, of trades spread across months and years.
It doesn’t need to imply that they win a greater number of exchanges than they lose – however for certain dealers, it does – yet, more critically, it implies that their victors generally compensate for their misfortunes over the long haul (to say the very least).
If you’ve been trading long enough and are wise enough to collect detailed statistics on your trading results, you can gradually develop a concise picture of the technical workings of your edge and how to best exploit or defend it against catastrophic drawdowns by simply adjusting your position sizing (or strategy if necessary).
In trading, losing is a part of the game, and there is no way to avoid it. You have no control over regardless of whether you will lose cash or how much cash you will win on each exchange, yet you can totally control your gamble openness for those misfortunes and the nature of the arrangements you decide to exchange.
In other words, you have control over how much you lose on each trade and when you trade. Risk management is where a trader’s power lies. The combination of high likelihood and the elimination of big losers allows for the accumulation of big winners over time.
With such a strategy, if you risk, say, 5% per trade, the winning times will be exhilarating, while the losing times will be devastating and potentially lethal. Trading that is consistently profitable and long-term does not look like that.
However, if you had a 58 percent win ratio and a risk-to-reward ratio of 1:2, you might be able to stomach a 2 percent risk on a trade. On your best setups, you could bet as much as 3% or more of your total equity. Most sensible professional traders would probably never go that high on a single setup, nor would they recommend it to retail traders, but for more aggressive traders with genuine edge, trading this way is not unusual and can be quite profitable.
It all depends on your personal drawdown tolerance. That is why there is no “one-size-fits-all” strategy that is superior to all others.
Some traders can handle a 30% drawdown, while others cannot handle a 10% drawdown. Length is another factor that traders should consider. In general, the higher your win ratio, the shallower and shorter your drawdowns will be (in theory). For a lower win ratio, the opposite is generally true. However, a strategy that frequently loses may make more money than a strategy that rarely loses (depending on the average Risk:Reward).
This is why risk to reward is just as important as win ratio, and the two cannot be meaningfully analysed separately. A higher reward frequently equates to a lower win ratio. It is basic to find some kind of harmony between the two while formulating a methodology. If you aim for trades with a risk-reward ratio of 1:10, you should expect significant losses.
It makes no difference whether the risk to reward is large or small. What matters most is that the strategy performs in a way that is compatible with your psychological make-up, as long as it makes money over time.
If you are impatient and dislike being wrong, trading a 1:10 RR strategy will be hell for you even if it makes money, and you are unlikely to use it to its full potential.
Just keep in mind to manage your risk properly.