The Pareto principle (or 80/20 rule to most of the English speaking world) applied to trading

Here’s an interesting thought if you subscribe to the 80/20 rule applied to trading…

(See http://en.wikipedia.org/wiki/Pareto_principle if this is a new idea to you)

learn-tradingIt is generally accepted (and quoted) the 80% of your success as a trader is about managing your psychology and the decision-making that underpins your trading, the other 20% being what you know and the systems you have in place.

Of that 20%, 80% of your success is determined by having a written, robust trading plan, the other 20% being other systems that you have around your trading, e.g. time management, contingency plans, monitoring systems etc

With your trading plan, 20% of your success of that can be attributed to “entry indicators”, the other 80% comprising in no particular order of importance, strategy set-up (including market conditions), how and where you set your initial stop, profit target (as appropriate) trail stop system, position-sizing method and some rules about when you wouldn’t trade that particular strategy from a personal point of view.

So lets do the maths…

Of the energy, effort and time you invest in your trading activities (lets give that a score of 100 to make it easy):
20 relates to your systems
80% or 16 relates to your trading plan
20% or 3.2 relates to your entry indicators

So why do people spend 80% of your time, energy and effort (because that’s what most people do!) at something that contributes in reality 3.2% to their trading success.

Interesting…!!!

PS that 3.2% is still important

PPS you need the original 80% to make that 3.2% work for you

Mike Smith

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