The One Trading Tactic That’s the Difference Between Success and Failure

One trading tactic that is the difference between success and failure that no one talks about. My name is Chuck Whitman and I build great traders who lead great lives, traders I've trained have generated in excess of a billion dollars, and they are some of the top traders at the world's largest hedge funds and trading firms. The one tactic I'm going to talk to you about today is called trading efficiency. Trading efficiency is simply the percentage of trades that you followed your rules and followed your plan, divided by the total number of trades that you made. Now, this efficiency ratio, it is the difference between being a really good trader and a losing trader. What's interesting is everybody looks at their trading system and they feel that their trading system is the key to whether they succeed or they fail. I can give you a system that has 100 trades and generates 25 cents in profit for every dollar bet, this is what we call expectancy, it's a 25 cent expectancy. With a 25 cent expectancy, if you had 100 trades you expect to make 25 R. Another way of saying it is if I bet $1,000 per trade, and I had 100 trades at the end of 100 trades, I would expect to make $25,000. This is a winning system.

However, if you make trading errors on 30 of the 100 trades that would cost you roughly 30 R or $1,000 per trade, it would cost you $30,000 in trading errors. So if we had 100 trades in which we made an error on 30 of them that cost us $30,000 At the end of the 100 trades, we would have a loss of $5,000. That's what it would have cost us. Now most people then would go look at the system and go, it doesn't work, I lost money. What they fail to realize is that the difference between the success of the system and their actual result was them. It was you, it was your mistakes, it was your lack of performance in being able to follow your rules that made it a failure, not the system. When we track efficiency ratio, we begin to take full accountability, full responsibility for our results and whenever we fully own our results, then we can make massive change. When we look at a trading system nd we look at efficiency ratio, we want to target a 90 to 95% efficiency ratio. If we're under 90%. We're making too many errors, and we need to clean it up. 

So errors are not following your rules. So let's talk about what are some types of errors. There's essentially two types of errors. There's what we call a psychological error and so we're going to denote that with a P or we have an execution error that we'll denote with an E. A psychological error is anytime that your rule said to you should do one thing, but you did another. So where your rule said this is where you buy, but you said Well, I think the market is going down, I don't want to buy, well at that point, you made a psychological error, you did not follow your rules. Another example, you say if the market rallies to this resistance level, I'm going to take my profits, the market skyrockets that level and you look at go up, maybe it's gonna go even higher. So you do not sell, a psychological error because you didn't do what you said you were going to do. Those are psychological errors and anytime we do that, we denote the error, and we label it with a P for psychology.

The second error is execution. So one of my traders had an execution error yesterday, he wants to go sell Dow Jones futures and he mistakenly sold the Dow Jones mini future rather than the Dow Jones micro future. He didn't mean to do it, he had two ladders up and in a hurry, he entered the order in the wrong book. So this is an execution error. So right away, he covered it and then sold it in micros, it costs him two R, he lost two times his risk on this error. Okay, so we're going to record this as a two R loss in the ledger and we're going to label it is E, execution error. Execution errors are like accidents, they're going to happen, but they're not a big deal. So examples of an execution error would be failing to cancel a stop after the trade was over, or forgetting to check on your trade at a predetermined interval things of this nature. So we have psychological errors, and we have execution errors. So what we're doing is we're recording that we made an error, that it's psychological or execution, and how much money we either made or lost in terms of R. Now remember, you can make money on error, you can make a lot of money on an error, but that's not a good thing. I once had an error that I made, I made $27,000 on the error, I was not happy about it. I actually looked at and said, Well, I'm gonna take that $27,000 and I'm going to allocate it to pay for other stupid things I do in the future. Look it as a blessing. 

When we track trading efficiency, we get a sense of how good we are and how good our system is. Once we know how truly good our system is, we can do research and we can consider making changes. The problem is is that people make changes without actually even knowing if the system was broken. As we talk through this concept of trading efficiency, one of the things you might be asking yourself is you'd say we got to follow the rules, what if I don't have any rules? Guess what, that's what we talk about in our upcoming matrix mindset method workshop. We talk about how to set our trading rules, how to write our trading plans, in a way that we can hold ourselves accountable in a way that is comprehensive in which we can address all the scenarios. So we're prepared for any situation. So if something negative happens, we're mentally prepared and we're in a position of strength. If something really positive happens, we're ready to capitalize on that blessing.

This is going to have a massive impact on your trading. Tracking your trading efficiency is literally the one technique that can be the difference between success and being a market wizard or failure and just being another trading idiot. The best part is you get to decide, it's up to you. If you like this video, one of the things you see and watching the trading matrix channel is that we open you up to a new reality, a different way of looking things. We expose you to the rabbit hole and take you down where you realize you have no idea how deep it goes. If you're interested in getting more information, you can look in the comments below and there's a link there that one, has a PDF for you outlining this trading efficiency process and two, there's a landing page if you want to get information and sign up for the matrix mindset method masterclass. I will see you in class. Every week stay tuned for Trader Tip Tuesday where I share exclusive techniques that take your trading to an elite level. I'll see you next Tuesday.