Most of the time markets are efficient and prices fluctuate in a more or less random fashion. Taking into consideration trading costs and other friction it becomes a challenging task to only breakeven without an edge. Although excellent execution, risk management, discipline and proper psychology are a must for any trading approach, they do not constitute an edge.
Having an edge means having a trading approach that has a positive expectancy. An approach has a positive expectancy when probability and reward/risk interact to yield a positive result over a larger sample size.
In all cases, the trading problem reduces to a matter of identifying when a statistical edge is present in the market, acting accordingly, and avoiding market environments that are more random.
Every edge that may exist for a technical trader comes from an imbalance in buying and selling pressure. Imbalances can sometimes be identified through the patterns they create in prices, and these patterns can provide actual points around which to structure and execute trades, but: I do not trade patterns, but the underlying imbalances that create those patterns.
Although it is difficult, there are good reasons to believe that markets are not always efficient and that there is a way for a small trader to beat the markets:
- Small traders are small enough – it’s not the big fish but the fast one that wins
- Small traders can be opportunistic – long/short in any market without any restrictions
- Small traders can choose any time frame – HFT have a shorter time frame, Fundamental funds have longer time horizon
Markets move from balance to imbalance, driven by emotions. Imbalances leave price patterns like a line in the sands. Only price pays and I am focusing on price and deeply believe to be able to beat the market
Source: I was not able to find it but at least 95% are from either Adam Grimes’ blog or from Adam Grimes – The Art and Science of Technical Analysis: Market Structure, Price Action and Trading Strategies