Over the long-term, there are two ways that traders lose:
- They have a Forex trading system without an edge; or
- They make mistakes trading their system
The latter is by far the more common of the two. But both are your responsibility. If you are trading a system without an edge, and don’t have a process for changing it to a system with an edge, you will find that this is just as much due to psychological factors as missing out on a trade because you were afraid to pull the trigger.
If there is no system, there is no system. For many traders though, it is hard to tell the difference between a winning system and a losing system because they make so many mistakes when trading it.
The cost of mistakes
Van Tharp, a trading psychologist, talks about a concept called efficiency. The greater your efficiency level, the less mistakes you make when you are trading. If you have an efficiency level of 90%, then you make only one mistake for even ten trading decisions you make.
In highly leveraged markets like Forex, a mistake can have a significant cost. I would estimate a mistake typically costs between 1R and 3R, or sometimes more.
Don’t believe mistakes can cost you this much? Don’t forget that if you have a 1R loss (that should have been a 2R winner), you are actually down 3R compared to what your system is supposed to generate.
This type of loss can easily turn a winning system into a losing system.
If you trade at a relatively high 80% efficiency rate, and each mistake costs you 3R, then you would be down 60R over the course of 100 trades. Or even if you have a 90% efficiency level, and have 10 mistakes out of every 100 trades, it costs you 30R.
As you can see, you need to have a very good system that generates a lot of profits to be ahead after these costs.
Kill your mistakes and save your system
The up-shot of this is that to save your trading system, you need to first cut out your mistakes.
How to do this?
It’s all about your beliefs and psychology, things we cover in the Advanced Forex Couse for Smart Traders (you can get FREE access).
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a part owner of Forex Signal Provider fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free.