The Pareto Principle In Trading

How the 80/20 rule can boost your performance

I’m sure you’re aware of the Pareto principle right?

The 80/20 rule that says 80% of your output comes from 20% of your effort.

So, in trading that could well mean that 80% of your P&L comes from 20% of your trades.

Vice versa with losses. 20% of your losers contribute 80% to your drawdown.

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Ok, so what?

Well, let’s work it back.

Say you are a day trader who trades 4 days a week.

  • Call it 45 weeks in the year.
  • Total days = 180
  • 20% of 180 = 36
  • 36 days. (Less than a few months)

You’ve basically got a 2-month window to make 80% of your annual profits…

Maybe you’re thinking “Err Mark, why does it have to be a 2-month window?”

Well, the market moves in cycles and rhythm, opportunities come and go, and sometimes the market is spitting out plentiful opportunities and you can do no wrong…

Other times it’s chopping about just waiting for you to get frustrated.

Your job as a trader is to take the Pareto principle and apply it to your trading.

  1. Where is the window of opportunity in the markets that you can maximise?
  2. Where is the most likely place you’ll give back profits?

Push the pedal down on the winners, and back off on the losers.

Then you can start using Pareto to your advantage.

Once you really start to embrace this phenomenon, you begin to see Pareto everywhere in your trading.

It’s worth spending some time thinking about.

More of what contributes to your bottom line, and less of what removes from it.