How to 80/20 your trades

Back in the early 1900s, Italian economist Vilfredo Pareto came up with theory … the Pareto Principle …

He’d observed that 20 per cent of the pea pods in his garden produced 80 per cent of the peas. I like to think of Vilfredo, sitting at his kitchen table, shelling peas, counting pods and weighing their contents, while trying to resist the temptation to eat them.

But this drove him to look into economic distribution and output, where he observed that 80 per cent of the land in Italy was owned by 20 per cent of the population.

This 20 80 rule has become a common rule of thumb in economics and business … the richest 20 per cent earn 80 per cent of the income … 80 per cent of a company’s sales come from 20 per cent of their clients …

This principle is found again and again in business and society – roughly 80 per cent of output comes from 20 per cent of input.

… and it’s no great leap to suggest that 80 per cent of our profits come from 20 per cent of our trades.

Let’s start with some easy questions that have nothing to do with trading …

– What are the 20% of foods in your cupboards that you eat 80% of the time?
– What are the 20% of clothes you wear 80% of the time?
– What do you spend 80% of your time doing that only gives you 20% of your happiness?
– Which 20% of the people you know do you get the most pleasure out of spending time with?
– What 80% of your possessions do you only use 20% of the time?

Once you’ve answered these questions, you’re likely to start seeing the things that you’ve been spending time, effort and money on that just aren’t worth it … spend less time with that 80 per cent of people you don’t really like … throw out some of that 80% of stuff that you never use …

Are you getting the hang of this now?

Okay, we’ll start taking a look at ‘80/20’ing our trading …

First, we’ll look at time spent on trading

What are the things you’re spending 80 per cent of your trading time on, that are only providing 20 per cent of your output?

I’m talking about stuff like staring at charts … checking emails … testing strategies in an uncontrolled way that won’t give you proper data to work from … rechecking emails … hunting down the holy-grail trading strategy … going back to that chart again … reading financial press … surfing internet forums … hang on, just checking that chart one more time …

I suspect I can waste as much time on charting packages as any self-respecting teenager can on social media sites!

So, what about the 20 per cent of time that is well-spent … for me, that’s in keeping good trading records … money management … testing new strategies and adjustments (as long as I’m doing this in a disciplined way – otherwise, it’s a waste of time) … formulating clear rules, so I can make fast decisions … going over my past trades to look for patterns of positive and negative behaviour I can learn from …

And what about our actual trades?

I’d like to urge caution here.

It may well be that 20 per cent of your trades are bringing in 80 per cent of your profits. But I’m not suggesting that you automatically can 80 per cent of your trading.

Trading is a very cyclical process, and different strategies tend to do well for a time, then others come to the fore. For example, with the MRP and MRP Energy systems that I’m using … one month one of them will be charging ahead, while the other is treading water … two months later, they’ve switched positions …

However, there may be an area of that under-performing 80 per cent that should be given the elbow.

Likewise, if something is working … see if you can get it working even harder.

This is nothing more complex than doing more of what works and less of what doesn’t.

Ask yourself:
– What’s working right now?
– What’s not working?
– What 20% should I be doing more of?
– What things can I stop doing or limit my time doing?

Give yourself a spare 15 minutes at the end of your week to ask these questions, and you should get some way to clearing the things that are getting in the way of your reaching your goals.

And hopefully you’ll also find some extra time to do the things you love …

Related posts:

Why do my trades keep losing? 3 ways to protect your trades that you may not have tried before