A competitive advantage is not a strategy, rather an ability to confidently overcome, adapt, and strategize. It is adaptive tenacity; a personal trait that can’t be bought.
I was recently reading a book called Currency Kings by Ben Robson. It details the stories of how (mostly well-known) traders like George Soros made billions trading currencies.
The book starts out by talking about competitive advantage and finding your edge.
Most people think of a competitive advantage as a strategy. “If I learn this price pattern or indicator I will be rich.” That isn’t quite true.
Competitive Advantage in Trading is Not a Strategy
In trading, you need a competitive advantage. You are trading against others. Every time you buy someone is selling to you, thinking they are smarter, and vice versa. And most of the market is composed of people/companies (hedge funds, mutual funds, companies running algorithms, full-time traders, etc) who trade for a living and who are very good. They have a competitive advantage over you for the first years of your trading journey.
Strategies change, or become better or tougher to trade in some environments. So a strategy isn’t a competitive advantage in and of itself.
When I started out day trading stocks I pulled several hundred thousand out of the markets using a particular strategy. It worked for a few years, and then it totally died. The profit potential was gone. I had to come up with something else. It was a hiccup, but not the end of the road. I just altered my method to suit the new conditions.
Therefore, a competitive advantage isn’t the strategy, because a very profitable method can disappear. It is the trader’s ability to adapt to changing market conditions, and to alter their strategies (or know when to sit on their hands) to those conditions, that gives them a competitive advantage. Competitive advantage is a personal trait…learned and forged within. Despite what the marketers would have you believe, competitive advantage can’t be bought.
That is why some traders may thrive for a year or two, but then blow up. They fail to adapt. Some programs or strategies you buy will work amazingly well, but usually, it is created by someone who hasn’t traded very long (less than five years) and so they have no idea how to adapt the strategy/program when conditions change. They have no idea how things could change. It quickly goes from working great to losing all your money.
A Competitive Advantage in Trading is the Ability to Confidently Adapt
Having traded as my main income since 2005, I still know there are tough market conditions I have not lived through. Yet, I am always thinking about ways to trade in these tougher environments in case they arrive, and attempt to build those ideas into my strategies/risk management. That’s my competitive advantage…knowing that what works today may not work tomorrow, and planning for that.
Discipline is another competitive advantage. It doesn’t matter how well we trade if we can’t control ourselves and end up losing it all in a fit of rage. Competitive advantage, discipline in this case, is forged within.
I also try to create strategies that work well in different market conditions. This way I’m not trying to force a square peg into a round hole. For example, double consolidations must after a pullback and mark a potential turning point, a cup and handles occur later, contraction patterns occur after that, and when the ascent is less vertical we tend to get trend channels. Different strategies for different conditions, but all sharing similar characteristics, like only trading strong stocks, and only buying swing trading stocks when conditions are favorable.
In itself, strategy is a good thing, and along with discipline, it forms a solid foundation for trading. …the system may work, although it would be difficult to predict for how long and to what scale [the future is different than the past…the past only gives us an idea of results, but future returns can vary drastically]. To win big, there needs to be more: a certainty that allows a trader to trade with a winning confidence. That certainty is a competitive advantage. — Currency Kings
Confidence comes from overcoming things that are tough, and putting in the work to know what we are doing works. I try to help my students with this, by getting them comfortable with their strategies (whether based on my strategies or their own), and executing those strategies well. This speeds up the process, even though it still takes time, but ultimately, if they never trust a method, they won’t trade it well. Maybe they need to vary it slightly so it suits their beliefs of what a great strategy is. The nice thing is that confidence doesn’t have to be there initially (and it probably shouldn’t be when starting out, because misplaced confidence can be a very dangerous thing in the markets!). By taking proper steps and seeing ourselves do something well, confidence will come.
Think about an area of your life you are confident in, because you have worked at it diligently. You don’t question yourself much in that area of your life, you just know you can handle what comes. Maybe you’re really good at your job. Things change every day, and there are always different situations to handle, and yet you do it. You adapt and use your strengths and confidence to get it done. That’s a competitive advantage, and that is where we want to get to with our trading. Our strategies and our psychology align so that we feel prepared for anything.
As the marketing for “easy money” becomes more pervasive, I must state that buying a strategy isn’t going to do you much good for long. It needs to be accompanied by information on adapting…when is the strategy used? When isn’t it used? How do we know the difference? How should we adapt when things get volatile or quiet? And even if these questions are answered, and the strategy is awesome, each person needs to agree with themselves that they will do the work to become confident (and stay confident) in that method and that they will build the discipline to execute it well, always [most people never make this agreement. They just hop from system to system, never becoming confident or good at trading them).
At some point, you have to say to yourself “I have put in the work. I GOT THIS!” and trust yourself to execute…on your own. If you need other people’s assurance for a trade, you aren’t trading confidently, so you probably won’t trade well. If you don’t know when a strategy should or shouldn’t be used, or how it adapts…find out, ask questions, look through charts to find out. Asking someone definitely speeds up on the process…but confidence won’t come till you start doing your own verification and homework. Studying charts and writing down what you find WILL build confidence because you see with your own eyes how things work.
Building and Keeping a Competitive Advantage
A few of my favorite books on building and keeping a competitive advantage are:
- Trading in the Zone by Mark Douglas
- Think and Trade Like a Champion by Mark Minervini
- The Art of Thinking Clearly by Rolf Dobelli
- Van Tharp has many great courses and books on working on the internal aspect of trading, which will help with building and keeping a competitive advantage.
After some time trading, many people notice that when everything else in life is going well, so is trading. Trading results often, not always, reflect what is happening inside of us.
Hit the gym, eat well, meditate, get some coaching, or attend positive/helpful workshops, sit and just think, take breaks from social media and technology, spend time outside.
All of these things help us feel better. They make us more mentally nimble and responsive to act on our knowledge which we should be expanding to learn about how conditions may change (researching history is a good start) and how we can adapt to changing conditions. This is a constant task, and successful traders adapt well because they expect and plan for change.
By Cory Mitchell, CMT.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.