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How to develop an edge?


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How to develop an edge?

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  #1 (permalink)
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Hi friends.

I always read everywhere i have to develop a methodology that works for me and fits my personality. The thing is, i don't even know what that means. I'm currently reading Van Tharp and Brett books and they explain for example that according to my life experiences i have developed a bias, a way of looking at the market. But i think the problem with me lies in that i can not recognise that bias. I know my personality out of the markets (like shy, introverted and stuff)because i've read some books about personality to help me, but i don't know what thinks to look for in terms of market. I would appreciate so much if you could help me with some resources (books, websites, webinars, blogs, people, etc).

I think all the material out there is focused on people who already have a methodology and just need the confidence on executing it (post methodology discovery). But at the moment i haven't found anything pre methodology discovery.

So far the only thing i know is that i don't believe in technical indicators.

Thanks.
Rhuz

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  #3 (permalink)
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cool post - this is more of a "place holder" to remind me to come back and elaborate when I have the time, meanwhile...

"edge" is thrown around a lot - so much so that I'm not convinced everybody deeply understands what it means. Firstly, be sure you know what it really means. Douglas does a great job of breaking it down


ignoring indicators, just looking at other peoples journals who are kind enough to post where their entries and exits are on charts is a great place to start.
losing characteristics include:
  • a bunch of trades where positive and negative outcomes are of similar amounts, or worse, losers are larger than winners
  • trading against the trend, trying to repeatedly pick tops, or bottoms
  • over trading - not trading near the edge - but lots of entries and exits within a predominant move
  • the most important point - no testing to see the presence of an edge by looking at the outcome of a whole bunch (say 20-40) trades at a time

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If you can take advantage of the mistakes of other traders on a consistent basis then you are on your way to find an edge. The next step is to find how these mistakes materialize on a chart and then begin to train your brain to recognize them as they emerge on the right side of the screen. Finally the hardest part, putting your money on the line and root-out the mental blocks you'll surely discover.

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Below is a passage that I recently posted to another thread. It should be lessons 1-100 on what to NEVER do in attempting to developing an "edge." It's like poison candy to starving children, for some reason.
------------------------------------------------------------------------------------------------------------------------------------
Another snippet from "Gambling Theory and Other Topics" by Mason Malmuth.

"Any competent statistician will tell you that one should first form a hypothesis and then collect data to either (statistically) confirm or reject the hypothesis. The way NOT to go is to collect data first and then look for patterns or trends to exploit. The reason that collecting data first is flawed is that with a large body of data, pseudo-patterns, which are logically flawed, will appear."

Peace,
Paige

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rhuz View Post
Hi friends.

I always read everywhere i have to develop a strategy that works for me and fits my personality. The thing is, i don't even know what that means. I'm currently reading Van Tharp and Brett books and they explain for example that according to my life experiences i have developed a bias, a way of looking at the market. But i think the problem with me lies in that i can not recognise that bias. I know my personality out of the markets (like shy, introverted and stuff)because i've read some books about personality to help me, but i don't know what thinks to look for in terms of market. I would appreciate so much if you could help me with some resources (books, websites, webinars, blogs, people, etc).

I think all the material out there is focused on people who already have an edge and just need the confidence on executing it (post edge discovery). But at the moment i haven't found anything pre edge discovery.

So far the only thing i know is that i don't believe in technical indicators.

Thanks.
Rhuz

and @kickmic


Quoting 
ignoring indicators, just looking at other peoples journals who are kind enough to post where their entries and exits are on charts is a great place to start.


Hahahaha....my "edge" is that I do understand several indicators and their interactions. And yes, I exploit that knowledge as much as possible.

To me if you have to ask what your "edge" is you have not really developed a your trading strategy. It is not something that you can be taught. Why are some sports figures more successful than others? Why are some business men more successful than others? Why are some contractors/architects world class and others are mediocre?.... the list could go on....

I doubt very much that the most successful had to ask others how to be top of their craft. Book learning and seminar watching take you to a certain level but to gain an edge you must see something you are better than the normal....and you exploit it to your benefit.

You have not found that inspiration yet it seems....no one can direct you

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There is no "edge".
A real edge comes from you knowing something that others don't, and how many can claim that?
Never think that anyone is smarter than the market.

If you develop a set of skills as a trader, you analyze your chosen market and notice
certain market behaviors that you act upon. This is your method.
Investigate how to execute your method relentlessly. execution is king(!) and sadly very under-appreciated.

You learn to deal with the ups and downs of your strategy once you test it.
Expect drawdowns, big ones, sometimes huge ones. Nothing is linear.

At some point go live and don't become a perpertual social butterfly paper-trader. When you will trade live you will get appreciation for liquidity, commission effect on strategy, your moods in lieu of real money traded and length of time for each trade. This will all lead to better implementation of your strategy.

Lastly, don't say you don't believe in something just because there is a consensus. People trade different time frames where different tools help in a variety if ways.
I hope this helps.

Matt

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mattz View Post
There is no "edge".
.

i don't think of edge like this at all.
a set of circumstances, scenarios, patterns, call it what you will align prompting the trader to make a trade.
the trader who really is exercising his/her edge accepts the outcome of the trade as uncertain. However, the trade is made on the basis of having made the same trade (including the risk management and profit management strategy) hundreds of times before, and that over a large sample base produces a positive outcome.

the edge ceases to exist when the outcome over a large sample base no longer produces a positive outcome, hence the need for continued review of groups of trades.

I interpret the original post as learning an approach to the market that when repeated over a large sample base produces a positive outcome.

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Edge simply means:

Know Thy Market!

This is the best way to describe the moment where you can guide your vehicule without the help of others.
To find this edge needs quite some "training". And time.
But to find a system that fits your personality - this is quite another chapter:
Define for yourself how much time you can and will invest for a trade. Now and in the future.
Then you define which daytime is best for you personally when you regularly want enter / exit your market.
Inspect carefully then what happens in that time within the market - movements, directions, volumes etc.
By then you are not far to make the right decisions to press some points out for yourself.
And you may put your own system to do right this.

Good Findings!
GFIs1

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My mistake for using the word edge (i already edited it), i think that caused a lot of confusion.

What i as trying to say is that i need help developing my methodology(and no, i'm not asking for yours). Have a clue on things like, what to look for in my personality so i could consider a trend system or a mean reversion for example or if i'm a patient person maybe scalping is not for me. I was looking for things more like this.


Quoting 
But to find a system that fits your personality - this is quite another chapter:
Define for yourself how much time you can and will invest for a trade. Now and in the future.
Then you define which daytime is best for you personally when you regularly want enter / exit your market.
Inspect carefully then what happens in that time within the market - movements, directions, volumes etc.
By then you are not far to make the right decisions to press some points out for yourself.
And you may put your own system to do right this.

Not like this.


Quoting 
Hahahaha....my "edge" is that I do understand several indicators and their interactions.
To me if you have to ask what your "edge" is you have not really developed a your trading strategy.

That's just what i was saying.


Quoting 
There is no "edge".
A real edge comes from you knowing something that others don't, and how many can claim that?
Lastly, don't say you don't believe in something just because there is a consensus. People trade different time frames where different tools help in a variety if ways.

I think the edge exist but is not what everybody thinks, if i don't have an edge i simply can't make money. The edge could be in my mind, in my ability to read the market or anywhere else but i have to be comfortable with it. And in terms of knowing something that others don't the only think i believe i have to know and others don't know is myself/themselves. That's how i will develop and strategy that i will feel comfortable trading.

For the indicators part for @Underexposed indicators are what you use and that's your bias or way of thinking so that's what works for you. For @mattz i don't say that about indicators just because others say so. I say it because indicators based on price are lagging and at the end is just another way of looking at price, that's my bias or way of thinking and i don't think that indicators are what drives price up, down or sideways. People use them, it's fine that's what works for them.

Thanks all for your comments.
Rhuz

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kickmic View Post
i don't think of edge like this at all.
a set of circumstances, scenarios, patterns, call it what you will align prompting the trader to make a trade.
the trader who really is exercising his/her edge accepts the outcome of the trade as uncertain. However, the trade is made on the basis of having made the same trade (including the risk management and profit management strategy) hundreds of times before, and that over a large sample base produces a positive outcome.

the edge ceases to exist when the outcome over a large sample base no longer produces a positive outcome, hence the need for continued review of groups of trades.

I interpret the original post as learning an approach to the market that when repeated over a large sample base produces a positive outcome.

I like your approach. However, I have learned that most refer to edge as some superior method.
Edge could be higher level of probability, it could be a large account withstanding high fluctuations or even discipline attained through constantly applying the method despite consecutive losses (most can't).

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rhuz View Post
@mattz i don't say that about indicators just because others say so. I say it because indicators based on price are lagging and at the end is just another way of looking at price, that's my bias or way of thinking and i don't think that indicators are what drives price up, down or sideways. People use them, it's fine that's what works for them.

Thanks all for your comments.
Rhuz

Yes, they are lagging, if you use traditional technical analysis. If you read flow, then it happens in real time.
But, neither are predictive by nature, therefore stating that they don't cause prices to move is a given.
All we are looking for are probabilities.

Lagging indicators like MAs are still very useful for short term traders because they can put context for medium and long term trends. They put context in place.
They are not useless, and if you deem something as such, it is our of your own real time screen experience.
Anyway, I don't mean to dispute your belief, just to show the other sides of the equation.

Matt

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mattz View Post
Yes, they are lagging, if you use traditional technical analysis. If you read flow, then it happens in real time.
But, neither are predictive by nature, therefore stating that they don't cause prices to move is a given.
All we are looking for are probabilities.

Lagging indicators like MAs are still very useful for short term traders because they can put context for medium and long term trends. They put context in place.
They are not useless, and if you deem something as such, it is our of your own real time screen experience.
Anyway, I don't mean to dispute your belief, just to show the other sides of the equation.

Matt

And I agree with you 100% I look at indicators too for context I don't think they are useless just that I don't think in them as you say in the traditional way like for entries, I'm not closed to any approach and really appreciate all the comments

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rhuz View Post

For the indicators part for @Underexposed indicators are what you use and that's your bias or way of thinking so that's what works for you. For @mattz i don't say that about indicators just because others say so. I say it because indicators based on price are lagging and at the end is just another way of looking at price, that's my bias or way of thinking and i don't think that indicators are what drives price up, down or sideways. People use them, it's fine that's what works for them.

Rhuz

There is a definite anti-indicator bias on this site. Personally I think it is because everyone is looking for a silver bullet indicator that will be the money maker.

I spent years looking at indicators and how they work...I literally spent over 10 years to get where I am today. Most people here that have discarded indicators have spent maybe a few months using them in ways that I discarded half a decade ago. Don't get me wrong there are some pretty dodgy ways that indicators are used but if you follow my journal I am not shy of showing how I use indicators to my advantage.

It is NOT my BIAS....it is my trading STRATEGY. It is how I have been able to live a comfortable life trading equities for over 10 years....through one of the biggest financial crisis in trading 2008-2009. I have never blown an account...ever, I have never had to go back to work since I went all-in around 2004.

It is a trading strategy... not my bias and I do discuss it in detail in my journal, free to all that wish to look at it.

You have not found your strategy to my way of thinking.

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My response might be controversial but here goes....

I can't stand the word 'edge'. There can be no edge in a liquid market that has a tick wide bid/ask spread. No matter what method you choose to pull the trigger, your success will be based entirely on trade management. IMO, good traders succeed because they have a successful strategy to manage their trades after entry. It is not their 'brilliant method' of selecting trades, it is their management of the position after they are filled.

Find a way to enter trades that makes sense to you (the method won't matter). But most importantly, learn how to manage the position after entry.

I'll give you an example of the importance of trade management and the unimportance of method of entry. I know of a very good trader who is somewhat of a guru in his chosen area of technical analysis (rhymes with park-it-snowpile).

However in his trading room, which is very transparent with trades called in advance, half the guys can't make any money. A room member tracks the trades religiously, and they are marginal at best. BUT, some guys, including the guru-moderator, are very successful.

How can that be? It is all in the management of the trades post-entry. Not doing stupid things like moving your stop to BE, for example.

The guru is a really great guy and really tries to help. He believes he can teach his entry methods to help people learn how to trade, but he is successful not because of his method. He is successful because of his trade/money management. He knows how to trade!

I firmly believe that for any currently successful trader, I could give them random entries and - because of their ability to manage a trade - they would be just as successful.

The particular method is unimportant, but the confidence in their method compels good traders to pull the trigger every time their 'setup' appears. But it is their superior trade management - not the 'set-up' - that makes them the $$$$$.

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My response might be controversial but here goes....

I can't stand the word 'edge'. There can be no edge in a liquid market that has a tick wide bid/ask spread. No matter what method you choose to pull the trigger, your success will be based entirely on trade management. IMO, good traders succeed because they have a successful strategy to manage their trades after entry. It is not their 'brilliant method' of selecting trades, it is their management of the position after they are filled.

Find a way to enter trades that makes sense to you (the method won't matter). But most importantly, learn how to manage the position after entry.

I'll give you an example of the importance of trade management and the unimportance of method of entry. I know of a very good trader who is somewhat of a guru in his chosen area of technical analysis (rhymes with park-it-snowpile).

However in his trading room, which is very transparent with trades called in advance, half the guys can't make any money. A room member tracks the trades religiously, and they are marginal at best. BUT, some guys, including the guru-moderator, are very successful.

How can that be? It is all in the management of the trades post-entry. Not doing stupid things like moving your stop to BE, for example.

The guru is a really great guy and really tries to help. He believes he can teach his entry methods to help people learn how to trade, but he is successful not because of his method. He is successful because of his trade/money management. He knows how to trade!

I firmly believe that for any currently successful trader, I could give them random entries and - because of their ability to manage a trade - they would be just as successful.

The particular method is unimportant, but the confidence in their method compels good traders to pull the trigger every time their 'setup' appears. But it is their superior trade management - not the 'set-up' - that makes them the $$$$$.

I think you hit the nail on the head! Although trade entry bares some importance it is basically irrelevant compared to trade management. Execution then becomes key as it is a useless endeavor if one was to constantly change and refine trade management.

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To me, an edge is a statistical edge, something that works better than a coin flip. Add in good money management, position sizing and you're off to the races.

So, even though you didn't ask, I'm going to give you an edge. You can use it or not, but the historical results of using this edge are

win rate: 52.63%
profit factor: 2.85
max drawdown: -10.88%
ratio avg win / avg loss = 2.67



The rules?
  1. There are three MAs
    1. regime MA(100)
    2. fast MA(5)
    3. slow MA(20).
  2. Enter long when fast MA crosses above slow MA when price is above the regime MA. Exit if fast MA crosses below slow MA
  3. Enter short when fast MA crosses below slow MA when price is below the regime MA. Exit if fast MA crosses above slow MA



Trade this on QQQ using WEEKLY bars.

OK, so I gave you an edge. There are plenty of criticisms people will now fling at me
  1. it's parameters are curve-fitted (I didn't do any optimization: 5, 20, 100, those are pretty nice round numbers, about 4-5x multiples of each other)
  2. weekly bars? that's not enough trades. i want to scalp futures to make $500-$1000 a day of income
  3. really, an MA cross strategy? that doesn't involve fibonacci numbers, digital signal processing, or artificial intelligence, that can't possibly work.

Here's what I like about this edge
  1. it has historical precedence that it works
  2. it's success can be explained by the characteristics of the market it trades
    1. NASDAQ stocks are heavy-weight tech and bio/pharma, which tend to have long momentum-driven runs in price because they can provide investors rapid growth as well as high volatility
    2. it follows a larger trend and only takes signals in the direction of the trend
    3. the higher time frame minimizes the damage slippage and commission can inflict on a trader's account

This is just one edge, one market. You can find similar trend-following edges on other markets. Diversify across markets, rinse repeat.

Then, diversify strategies. Try a mean-reversion/range-bound market strategy. Which markets tend to exhibit this sort of behavior? And during which seasons?

These are all knowable and repeatable. The edges are there, you just have to find them and trade them in a way that meets your personal lifestyle (time demands, time of day, frequency of trades) and how you deal with risk/loss. If you don't know what your psychological make-up is, just try some different ways of trading, you'll eventually find which ones best fit you. Nobody can tell you which way works for you. You have to just do it to figure it out. It's like dating: lots of rejection, but over time you figure out what kind of mate/partner you are wanting and which ones to avoid.

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shodson View Post
Nobody can tell you which way works for you. You have to just do it to figure it out. It's like dating: lots of rejection, but over time you figure out what kind of mate/partner you are wanting and which ones to avoid.

I really appreciate your response and loved this last part. Thank you very much for the explanation .

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  #19 (permalink)
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While it is quite easy to "money manage" your way to "Broke" --- while betting with a positive expectation ----there is absolutely no way to "money manage" your way to long-term profitability if your bets have a negative expectation. The entire concept is plain silliness. It reminds me of some of the advice given in numerous misguided books on "how to beat the casino".

And just because someone claims (on the internet) that they've had a history of success exploiting pseudo-patterns in past stock prices or with some combination of indicators -- does not mean they are a model by which to pattern yourself by or take advice from -- it just means they have "yet to go broke".

And when each does, you can rest assured that there will be 3 more internet advice-givers to take the place of each.

Money management will allow you to enjoy complimentary meals, drink expensive liquor, get you a whore, sleep in a suite, give misguided advice to your fellow players -- and do all of this for much longer than some others may enjoy --- but under no circumstances does "money management" have the capability to give you a positive expectation.

Peace,
Paige

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Paige View Post
While it is quite easy to "money manage" your way to "Broke" --- while betting with a positive expectation ----there is absolutely no way to "money manage" your way to long-term profitability if your bets have a negative expectation. The entire concept is plain silliness. It reminds me of some of the advice given in numerous misguided books on "how to beat the casino".

And just because someone claims (on the internet) that they've had a history of success exploiting pseudo-patterns in past stock prices or with some combination of indicators -- does not mean they are a model by which to pattern yourself by or take advice from -- it just means they have "yet to go broke".

And when each does, you can rest assured that there will be 3 more internet advice-givers to take the place of each.

Money management will allow you to enjoy complimentary meals, drink expensive liquor, get you a whore, sleep in a suite, give misguided advice to your fellow players -- and do all of this for much longer than some others may enjoy --- but under no circumstances does "money management" have the capability to give you a positive expectation.

Peace,
Paige

Actually every trader from multi-billion dollar hedge funds, professional money managers, and even profitable retailers are all "waiting to go broke". +EV or not every system and equity curve has volatility. Due to the non normal distribution of the markets as well as the infinite possibilities of volatility, every system will go broke given a fixed account size. The larger the account size relative to trade size, the smaller the historical equity curve volatility, and the higher the average trade expectancy all increase the N trades it takes until such a event (call it black swan if you like) occur it is inevitable. As your N trades approach infinity, your chance to go broke approaches infinity.

Really your job is to retire before you reach that point.

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It's like a coach studying the opponents film. Just watch the markets. Try things that seem like they could work. Keep watching. Keep trying things and it will come together if you out in the screen time.

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Any game with lots of particpants is random - hockey,footbal is random,you never know where the puck/ball goes next moment - you anticipate,but you don`t know.But there are certain rules to play these games,though.

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I also emailed Andrew Menaker (you can look for him on google) asking about this same subject and he wrote me back this.



Thanks.
Rhuz.

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I`d ask Menaker,what instrument is not highly leveraged or better yet,what`s not leveraged you deal with daily?That`s the main thing is about.When a boxer enters the ring,his opponet is highly leveraged.Every thing you deal with day in and day out is highly leveraged,so the defensive mode is prefferable.Activity is punished,on the other hand.You won`t recal when you got wiped out in a defensive mode,i`m sure.

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Find areas in the market you can make more money than you can lose. From there learn how to lose less money with each trade. If all else fails just watch the charts. How many hours a day do you watch price action? How many days have you been doing that for?

R.I.P. Joseph Bach (Itchymoku), 1987-2018.
Please visit this thread for more information.
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Below is a post I made to this forum a couple of years ago. The disclaimer is that I do trade myself and enjoy it immensely. But I also attempt to see it for what it is -- and not what I wish it were --- or want it to be.
_______________________________________________________________________________________________

"Because one can point to traders who (up to this point) have a winning track record -- or died before they went broke --- does nothing to change the fact that trading is absolutely gambling.

There are lottery winners everyday -- but any fool knows that you can't play the lottery profitably from a mathematical standpoint.

Many people return home from Las Vegas winners -- but it doesn't mean they have necessarilly done so by playing an edge.

Many people have died in commercial airliner crashes -- but do you really think you can intentionally pick-out a flight that will crash in the future? But there are dead people to prove that dying this way can be done, right?

'Backtesting' pseudo-patterns and strategies on (financial instrument) charts is a very alluring, I will admit. But unfortunately, it's a trap.

Probably your best chance in this business is to hope and attempt to get lucky -- and make a big hit -- with very low risk. And then (for God's sake) -- don't go back to the well by putting any significant portion of your winnings at risk.

If you must continue, by all means follow the same strategy again. This way, you have the opportunity to either get lucky again --- or not live/trade long enough to go broke."


Peace,
Paige

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Cachevary View Post
I`d ask Menaker,what instrument is not highly leveraged or better yet,what`s not leveraged you deal with daily?That`s the main thing is about.When a boxer enters the ring,his opponet is highly leveraged.Every thing you deal with day in and day out is highly leveraged,so the defensive mode is prefferable.Activity is punished,on the other hand.You won`t recal when you got wiped out in a defensive mode,i`m sure.

That's very true. But you won't win thinking you're going to lose. It's all about balance on both ends.
In a winning trade, the trader should remain in the winners mindset. In a losing trade, the trader should
remain in the losers mindset. Cut your loser, let your winner run (or at least to your first target and let the 1/2 or 2/3 left run to the next target).

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Massive l View Post
That's very true. But you won't win thinking you're going to lose. It's all about balance on both ends.
In a winning trade, the trader should remain in the winners mindset. In a losing trade, the trader should
remain in the losers mindset. Cut your loser, let your winner run (or at least to your first target and let the 1/2 or 2/3 left run to the next target).

Sure thing.If by ''mindset" you mean a certain set of belives,then your best bet would be to just leave them roll on their own and observe.And if you fail,reset your set of believes.Rinse and repeat... or better yet,find a helper - Guru(which is usually hard to accomplish - the Guru can be false).

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Massive l View Post
In a winning trade, the trader should remain in the winners mindset. In a losing trade, the trader should
remain in the losers mindset.

Your edge will come when
- you are mentally balanced
- you conquered the fear to push the button with real money
- when a loss is no longer taking you down on the next trade(s)
- if you are aware to take a long trading journey within unknown fields

Means: Keep calm - but run!
Good Trades
GFIs1

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