How To Improve Your Trading

[weiwei]

I believe every trader constantly asking that question on how he/she can take he/her the next level. I have found this rule very useful and universal, and yet not many people paying much attention on it. So I guess it could be an edge once you understand it and utiiize it fully.

Rule of 80/20. Once understand it, you can apply it to many areas and knowing where to focus your energy to get the max output.

Basically this rule states that 80/20 is the proper ratio for many things at final end.

Example:

1. In US 80% of wealth is control in 20% of population.
2. 80% of your income will come from 20% of your skill set.
3. Freeway usage, 20% of the time will contain 80% of the traffic. (traffic jam)
4. 80% of the market volume came from 20% of the people.(Institutional involvement)

But a lot of time the ratio could be 90/10, 70/30 or 60/40. Basically the idea is that things are not evenly distributed as 50/50, there is bias toward one side and the ratio of 80/20 usually can give very good approximation.

so as an individual trader, how can we improve our end result base on this rule.

Basically, once you got enough data, you can then find out which system fit under this rule, then improve on this system

For example: you have 5 different systems. and one of them performs better then all other 4 systems, and produce the 80% of your profit. Then by increase position size on this system, you will be able to produce much bigger result.

Come to think of it, the famous turtle trading system utilize this concept well. Turtle system will add to a position when the trend is on its side, then keep adding positions until the market go against it.(but it dose have a max size allow for each position).

So in other word, when it catch a trend, it will capitalize on it. even with a 30%-40% winning ratio, turtle system was able to get an good annual return for its investors.

How about Ed Seykota from Market Wizards, he dose the same thing as the turtle system on the position size up. (add more position to a winning positions to capitalize on a persist trend)

These are some the best traders who max out this 20/80 rules. when that 20/80 ratio show out, capitalize on it will improve your trading result dramatally.

weiwei

PS: I do not recommend people to just using trend-following system, especially on intra-day bases. These are just meant to be an example. Basically trend-following system needs a lot of money and nerve of steel, and most people just do not have that combination.(my opinion on trend-following system)

[MrPaul]

WeiWei,

Nice write up. The 80/20 rule is also called The Pareto principle. The Pareto principle can help with time management as well. Richard Koch wrote a pretty good book on the subject entitled The 80/20 Principle.

Here's a couple links:

Pareto principle - Wikipedia, the free encyclopedia

Richard Koch - Wikipedia, the free encyclopedia

[torero]

So any specific examples how these rules applies to charts, trends, entries, exits?

[brownsfan019]

I didn't believe or understand the 80/20 rule till I was in a sales job. As a broker, my ratio was more like 85/15 where 85% of my income came from my top 15% clients.

I would be interested to see the translation into full-time trading though... I guess you could break down each of your setups and see what kind of winning percentage results from those. For example, if the XYZ setup produces a profit 80% of the time; whereas the ABC setup only produces a profit 30% of the time, it may be best to focus your efforts on the XYZ setup. Of course, this type of analyis would require constant and detailed tracking. There's many ways you could break it down... by setup, by time of day, by day of week, by time of month, etc. etc. It could be very useful but would require detailed documentation over an extended period of time.

[weiwei]

Thank you MrPaul for the link, these links wuld give move details to others who would like to find out more about this rule.

Brownsfan091, thanks for that insightful input. You pretty much nail it. And I totally agree with you on that constantly monitoring and detailed documentation are key to utilize this rule fully.

The basic idea behind this is to present an workable rule for people to focus on, and rest is up to each individual to carry it out.

weiwei

PS: I am willing to post some more example if there is interest on this topic. But for now, I will stop right here and leave the thinking upto each individual.