As you embark on your trading journey, you're likely bombarded with advice on identifying market structure using higher highs, lower lows, and countless other technical patterns. However, by the time you identify the structure, the trade is already finished.

This article will break down a more practical approach to trading and help you understand how to find a Market Edge, a key to consistently profitable trading.

As you begin your trading journey, you're likely flooded with advice on recognizing market structures through patterns like higher highs, lower lows, and various other technical indicators.

However, by the time you've identified these structures, the opportunity has often passed. In this article, we'll explore a more practical approach to trading and show you how to discover a Market Edge—the key to achieving consistent profitability.

The Market Edge: What It Is and Why It Matters

A Market Edge is the unique behavior or characteristics of a specific market in the short term, giving you an advantage when trading.

Each market—whether it's crude oil, wheat, or the S&P 500—has its own distinct patterns and tendencies. Instead of relying on broad, one-size-fits-all strategies, your job as a trader is to identify these behaviors and tailor your trading approach accordingly.

Here’s a powerful analogy: Think of the market as a sports team. 🏀 Every player has their own strengths and weaknesses, and in the same way, each market has its unique tendencies in the short term. Just as you wouldn’t ask every player to perform the same role, you shouldn’t apply the same strategy to every market. Your success hinges on understanding the unique "personality" of each market.

How to Find Your Market Edge

Finding your Market Edge involves more than just reading a chart. Here's a simple process to guide you:

1. Analyze Historical Data: Begin by examining long-term historical data to see how the market behaves over time. Are there more profitable days when going long (buying) or short (selling)? 📊

2. Identify Market Regimes: Determine if the market behaves differently during bullish (upward) and bearish (downward) trends. For instance, you may discover that certain short strategies perform better in bull markets for specific commodities.

3. Use Simple Filters: Apply straightforward filters like “Was yesterday an up or down day?” to refine your edge even further. In the wheat market, using this filter significantly boosted profitability. 🌾

By following these steps, you can better understand the nuances of each market and enhance your chances of success.

"By the time you define higher highs and higher lows, the trend is already gone."

Examples

Below are the average results in dollars (green) for a single contract when buying at the open and selling at the close each day. On the same chart 📈, you'll find the win/loss ratio (red). Here's what we can observe:

• Canadian Dollar / US Dollar: The average trade hovers around 0, and the win rate is also nearly zero, showing no clear edge.

• Crude Oil: While the average trade is negative, there's a conflict with the win rate, which is 7.3% higher than the loss rate.

• Euro / US Dollar: Similar to the Canadian Dollar, there's no distinct edge.

• S&P 500, Natural Gas, and Wheat: These markets show a clear edge, with the average trade aligning perfectly with the win/loss ratio.

With this information, it's much easier to build long strategies for the S&P 500 and short strategies for Natural Gas and Wheat. 🌾

And that’s the essence of the Market Edge—it’s the extra insight into each market's tendencies, allowing you to develop profitable and robust strategies that is perfectly aligned with the market characteristics.

Natural Gas: Translating the Market Edge into Practical Terms

Out of the five markets tested, Natural Gas shows the highest edge. Let’s break down how this translates into actionable strategies.

Below are five strategies that, while not optimized, already perform well. Each one uses a pullback entry signal, with positions exited after a fixed three-bar period. There’s no stop loss or profit target involved.

Simply entering every day when there’s no position and exiting after three bars results in a 1.76 Ret/DD ratio. The next five strategies 📊 are based on the following entry signals:

1. If we’ve had three up closes in the last four bars

2. If RSI is above 75

3. If the high is the highest in the last 10 bars

4. If the close is above the Bollinger Upper Band

5. If the Ultimate C% is above 75

Each of these strategies significantly outperforms the base strategy, which is essentially always in the market. The Ultimate C% strategy stands out, generating $161,640 with a 5.06 Ret/DD ratio. 📈

"Market Edge is all about finding the characteristics of each market—long or short, mean reversion or breakout."

Next, I took the Ultimate C% strategy and enhanced it by adding an exit signal and combined it with several Market Regime filters.

Below, you’ll find the results of the top 20 strategies, sorted by Ret/DD, with the top strategy showing 215% improvement over the original Ultimate C% strategy.

By incorporating these refined techniques, you can see how understanding the Market Edge can translate into more profitable trading strategies. 💡

Final Thoughts

The key to long-term trading success isn’t about finding the perfect indicator, trend, or strategy. It’s about understanding the underlying characteristics of each market you trade.

As you’ve seen, building a robust strategy becomes much easier once you start with a Market Edge. The entry or exit signal almost becomes secondary because the wind is always at your back when you’re aligned with the market’s natural tendencies.

By focusing on finding your Market Edge, you’ll stay ahead of most traders who are constantly chasing strategies that underperform—or worse, fail altogether.

Take your time, study the data, and start with a strategy that’s aligned with the Market Edge. As you gain more experience, refine your approach by building filters and market regimes that match the behavior of the specific market you’re trading.

And here’s some great news! My Algo Trading Masterclass includes the Market Edge testing and database plus Market Regime filters. You’ll gain access to in-depth tools that help you refine and perfect your trading strategies based on real market behavior.

If you'd like the code for the strategy to test it yourself, feel free to reply back—I'd be happy to share the open code with you.

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