When traders think about developing a system with an edge, the conversation almost always revolves around the entry point. It’s natural, really—where you “get in” feels like the moment that defines the trade. But the truth is, an edge in trading is far more complex. It’s not just about the entry; it’s about how entry, sizing, exit strategies, and risk management all come together to form a cohesive, profitable approach.
In fact, the edge doesn’t have to come from the entry at all. That might sound counterintuitive, but let me explain.
Most traders focus their energy on pinpointing the perfect entry signal. They obsess over indicators, patterns, and market timing, convinced that success hinges on that one moment. But what if I told you that a system could be profitable even with entirely random entries?
That’s exactly what Van K. Tharp demonstrated in his book Trade Your Way to Financial Freedom. He outlined an experiment where trades were entered randomly—literally flipping a coin to decide whether to go long or short. These entries were then paired with a trailing stop and a position-sizing model based on volatility. The results? The system was profitable over time.
This example is often used to illustrate the importance of risk management and exits over the entry point. But let’s take a closer look at what’s really going on here.
While Tharp presented this as a random-entry system, we believe it was, in fact, a trend-following system in disguise. The trailing stop ensured that losing trades—typically counter-trend trades—were cut short, allowing the system to jump back in quickly. On the other hand, trades that aligned with the prevailing trend were allowed to run, capitalizing on extended market moves.
So where’s the edge? It wasn’t in the random entries. The edge came from two key factors:
1. Exit Strategy: The trailing stop was designed to capture trends while minimizing losses.2. Market Conditions: The system worked because it was run during trending markets.
This is where the story gets interesting. The system wasn’t truly random. Its success relied entirely on market conditions. In a sideways or choppy market, it would have been crushed. Tharp either misunderstood this or deliberately left it out, which makes the conclusion misleading.
But here’s the thing: the system didn’t need to be random at all. In fact, it could have been significantly improved by replacing random entries with entries that simply followed the market’s current direction. A basic rule like “trade in the direction of the last X bars” would have filtered out many counter-trend trades, reduced unnecessary losses, and made the system even more effective.
This highlights an important lesson: while entries aren’t the sole driver of profitability, they don’t need to be random or arbitrary. Even a simple, logical entry rule can complement a strong system and enhance its edge.
Another key factor in the system’s success was the nature of market volatility. The trailing stop was based on ATR, which adjusts dynamically to volatility. This allowed the system to react to changing conditions, but it also came with limitations:
Volatility Spikes: If volatility spiked suddenly, the trailing stop would widen excessively, exposing the system to larger losses than intended.
Volatility Troughs: If volatility dropped sharply, the trailing stop would tighten, increasing the likelihood of being stopped out prematurely.
For the system to succeed, volatility had to remain relatively consistent. In markets where volatility spiked and troughed erratically, the system’s edge would have been severely compromised. This highlights yet another layer of complexity: it’s not just about identifying trends; it’s about ensuring the conditions, including volatility, are supportive of the system.
This example highlights a broader issue in trading: the overemphasis on entries. Traders fixate on “where do I get in?” and neglect the other components of their system. But a profitable system is about more than just entries:
Risk/Reward Ratios: Traders can tweak R:R to improve outcomes, but this might impact win rates. The key is balancing these variables to maintain overall profitability.
Position Sizing: Even with perfect entries, poor sizing can turn a winning system into a losing one.
Exits: How you manage a trade after you’re in often matters more than how you got in.
Ironically, traders often focus on improving their entry signals when the real gains come from refining how they manage risk, exits, and their ability to adapt to market conditions.
One of the most overlooked factors in trading systems is understanding when to use them. Even the best systems fail in the wrong conditions. A trend-following system like the one Tharp described thrives in markets with clear directional moves but struggles in sideways or highly erratic markets. The edge wasn’t in randomness—it was in applying the system selectively.
Knowing when to “switch the system on or off” is a critical part of trading, yet it’s rarely discussed. This is where experience and market awareness come into play. No system works all the time, and the ability to recognize the right conditions is what separates average traders from great ones.
The lesson here is simple but powerful: the edge in trading isn’t just about entries. It’s about the entire system—how you size your trades, manage risk, and exit positions. It’s about understanding market conditions and adapting your approach to them.
If you’re spending all your time searching for the perfect entry, you’re missing the bigger picture. Trading success comes from consistency, discipline, and the ability to execute a well-rounded system. So the next time you find yourself obsessing over an entry signal, ask yourself: “Am I focusing on the right thing?”
Because the edge isn’t where you think it is—it’s in everything else.
