The Risk of Trading: Mastering the Most Important Element in Financial Speculation

INDICATORS THAT DETECT EDGE

There is enough market information, charting data, and technical indicators to keep a trader very busy these days. It's clear by now that the quantity of information available doesn't help traders gain an advantage on a trade or in their trading career. So how does one begin to decipher which indicator or chart to use? Before we determine either, we must gather our most important element to edge-based trading.

Historical Data

The most valuable tool we have to be able to forecast or predict future price movement is via the use of prior activity. The basis for data-driven trading strategies is reliant on the premise that history repeats itself when presented under similar market conditions. Historical data can come in the form of price movements, price patterns, or price reactions at key inflection points. Price movements can also be correlated with other market activity, such as price reaction in a stock index when a foreign currency pair moves in a particular direction or pattern. Assessing these forms of information to capture edge can be limiting in the sense that it does not factor in the human element. Traders’ strengths and weaknesses are not captured in raw price data provided by the exchanges and used on simulated trading platforms. A particular price pattern may be difficult to detect for one trader, while another may detect the same edge easily but it may be difficult to allow one to pull the trigger at the optimal opportunity.

Using historical ...