Building An Edge: Trading Live Futures With The Potential To Win | StoneX

By definition, a trading edge is an approach to the market that creates an advantage over other participants. Finding or designing such an advantage for live futures requires some work. Nonetheless, if established and applied over time, the rewards from building an edge may exceed all expectations.

The Anatomy of an Edge

Edges come in a wide variety of forms, some simple and others complex. They may be rooted in fundamental or technical analysis, or they may be the product of discretionary or systematic methodologies.

However, regardless of type, all tangible live futures edges must be quantifiable. No matter if your edge is applicable to scalping WTI crude oil or day trading the E-mini S&P 500, it must be rules-based and statistically verifiable. Otherwise, a perceived advantage may simply be a product of chance.

In reality, solid edges aren’t easy to find or develop. The markets often behave in a random fashion, presenting tendencies that appear to be real but end up being temporary or false. However, once you identify an advantage, building, maintaining, and evaluating your performance can become routine.

Building Your Strategy

After establishing a potential money-making advantage, integrating it into a live futures trading strategy is fairly straightforward. You can incorporate it into the three primary parts of your comprehensive trading strategy:

• Trade selection: Positive-expectancy trading opportunities are identified according to the edge. This may remove the guesswork from market entry and helps promote consistent execution.
• Position management: A viable edge addresses risk and reward in concrete terms. Whether it’s trend-following, reversal, or rotational in nature will determine when to exit the market and potentially realize profit or loss.
• Risk/Money management: Responsibly managing leverage is a key part of any comprehensive strategy. Whether you’re trading static or variable lot sizes, the edge’s strength regulates the degree of risk assumed.

From a strategic perspective, an edge promotes the selection of positive-expectation trades in concert with an ideal risk vs. reward balance. Add in the prudent use of leverage, and your comprehensive strategy is ready to go.

Evaluating Performance

Unfortunately for active traders, what worked yesterday doesn’t always work today. The markets are dynamic, and the future efficacy of a strategy is not guaranteed. In order to make sure that your edge and strategic approach remain valid, you need to evaluate performance on an ongoing basis.

Here are two exercises that you can use to scrutinize performance:

• Track record: A simple tally of wins and losses is a useful tool for measuring performance. Once it gathers enough data, a statistical track record can shed some light on when an edge is at its weakest or most powerful.

• Comparative analysis: It’s often helpful to compare a strategy’s evolving profit and loss (P&L) against others of the same type. For example, if you’re practicing a reversal strategy based on Stochastics, it may be instructive to compare this approach to other reversal-type strategies. If performance is lagging significantly, it may be time to rethink your methodology as a whole.

The primary goal of the evaluation is to quantify performance within the context of live futures market conditions. It’s a measuring stick that considers not only P&L but also the efficacy of the aggregate strategy. Strengths and weaknesses are clearly identified, thus making strategic fine-tuning exponentially easier.

Maintenance

Once you’ve completed the performance evaluation, a strategy’s strengths and weaknesses should become evident. Over the strategy’s life cycle, it will be necessary to periodically improve or preserve the validity of your edge. This may be accomplished by asking the following questions on a regular basis:

• Is my strategy being applied consistently according to its defined parameters?
• How big of a factor are undue trade-related latencies? Do I need to upgrade my hardware, internet connection, and software platform?
• Can I improve trade-related efficiency? Will my strategy function better using different order types or in another market?

Finding an edge and building a comprehensive trading strategy involves a lot of work—and so does maintaining your advantage. The performance of money-making systems has a tendency of degrading over time. It’s imperative that you apply your strategy in a consistent, efficient manner. If your strategy stops performing, it may be an opportunity to change up order types, software platform, or even the markets being traded.

Trading Live Futures with the Potential to Win

The primary goal of trading live futures is to make money. Strategic sophistication and finesse are secondary characteristics. No matter how elegant a methodology may be, it isn’t worthwhile if it fails to generate profits.