Obviously, the edge lies in information. Whoever gets the most relevant information about the next probable move first, and combines it with good capital and risk management, wins. But lets go to the most general level. Within what typically happens in markets, where does the edge really lie. What is the constant value generator in the markets.
There is something that has held up across centuries. It is not the only edge, not the only advantage, but it is the most robust one, and the one we are all really looking for as retail traders.
The edge lies primarily in two places, trading with the trend, and the relationship between risk and reward.
Trading with the trend
I constantly see traders going against the first point. What typically happens is that someone sees the price rally to a resistance level and sells, or drop to a support level and buys, whatever tool they are using or whatever their methodology is.
This is not necessarily a bad thing. It depends on whether they are following the trend or not. If the price rises to resistance and they sell in the middle of a downtrend, in principle, they have an edge. If they do it in an uptrend, they do not, on the contrary, they are at a disadvantage.
This applies to all markets, but lets take the obvious case of a trader shorting TSLA in the middle of an uptrend because it went up too much, they saw a divergence, or whatever the reason. They can win, of course, but over time, I argue, it is not a winning strategy.
In this imaginary example, TSLA is in the middle of an uptrend. Some of the fundamental reasons might be, as time passes, the company brings in more and more cash flow, which means profits for investors, net profit, and cash flow. As time passes, the company improves and builds its latest robot model, which will make it a leading company, and that makes people willing to pay more for the shares.
In that scenario, our trader is short. Lets say a month passes and they are still short, they have some gains, but the expected collapse has not come. The problem this trader has is that during that entire month, the company was generating cash flow and perhaps advanced on its robot prototype. Now people are willing to pay more, so if before they wanted to buy the stock at 200, now they have no problem buying it at 210. The trader who went short is being squeezed as time passes. If the price does not collapse, within a month someone will be willing to pay 220 for that stock. This trader will still be short, buyers will come in, and the price will move toward their entry point, or worse, their stop loss.
Now imagine the opposite case. A different trader buys TSLA shares, the price stalls near their entry point, they have a little profit but nothing serious. Time passes, the tide rises, investors are willing to pay more, and their position keeps improving. Not only is this trader aligned with the flow of events and of orders, but the value they themselves calculated as their final target is also rising as time passes. Both the floor and the ceiling of this market are rising, and this trader is already surfing that wave.
The relationship between risk and reward
Although this is not the case for the big majority of retail traders, lets assume that someone has taken statistics from their tools and knows the probabilities of each setup. For example, a trader of Smart Money Concepts knows that if they buy at this low, there is a 50 percent probability that the price reverses upward, or a trader of supply and demand zones sees that the price falls to a demand zone and knows from their studies that there is a 50 percent probability that the price reverses if they enter right there.
Lets assume a constant coinflip. Someone was surely expecting much more than 50 percent, but the key word is constant. For any serious statistical analysis, the results will yield certain outcomes that are presumed to be robust, and now this trader knows with certainty what their probabilities are on each trade. What always changes is the market context, the market structure.
Today they wake up and see that if they buy this low, the next high acting as resistance is at a certain distance. Tomorrow they wake up and it is a different setup. Both give them different risk to reward ratios. The first tells them that if they buy the low they can make 3 times their risk, the second tells them they can make 2 times their risk, measured from entry to the first resistance level.
The probabilities are exactly the same because they come from their statistical study of market patterns relative to their supply and demand zones or liquidity pools. This trader can stand in any market, any timeframe, and know their probabilities. But the risk to reward varies. The first case is much more advantageous, it generates more gains and more value. There is a constant and there is a variable. Their statistical work does not vary because it is grounded in fundamental market constants. The structure varies all the time. In one case they generate much more money than in the other over time, and perhaps this trader decides to build rules around that. Maybe tomorrow they see a setup offering 1 to 1 and decide not to take it, because they know that if they wait a little, a setup offering 2 to 1 or 3 to 1 will appear under the same probabilities.
In conclusion, the context in which price fluctuates matters a great deal. Speaking from my experience and based on my way of trading with trendlines, if I see price rising to resistance, meaning a point where a downside reversal is probable, that does not mean I automatically have a short worth taking. Perhaps in those circumstances the best course of action is to wait for price to drop to a support level to buy, because that reversal might simply be long traders taking profits or traders who went short for a very brief period of time. And if we look at other markets beyond equities, such as commodities or currencies, the same applies, only with different economic variables like production and consumption or interest rates and inflation. The principle still holds. Every time we enter a position the world keeps moving and time keeps passing, and the passage of time does not always work in our favor. Sometimes it does, sometimes it does not, and when it does, that is a legitimate edge.