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80/20 P2
How often have you heard “90% of traders fail while only about 10% make consistent money”? Often, I am willing to bet. Whilst the exact ratio of traders who make money vs. those who lose money is obviously almost impossible to pinpoint, it probably is somewhere between 80/20 and 95/5. Have you ever thought to yourself “why is trading apparently so difficult that 80 or 90% of people fail at it?” I’m willing to bet you have, and here is my answer to this pervasive question:
Trading is the ultimate “less is more” profession, but it’s also extremely difficult for most people to accepting the following:
80% of trading should be simple and almost effortless, 20% is more difficult
80% of profits come from 20% of trades
80% of the time the market is not worth trading, 20% it is
80% of the time you should not be in a trade, 20% you can be
80% of trades should be on the daily chart time frame, 20% can be other time frames
80% of trading success is a direct result of trading psychology and money management, 20% is from strategy / system
80% Simple, 20% Difficult
This one is easy. Most of what we do as traders is sit in front of our computers and look at prices going up or down or sideways. This is not by anyone’s standards “hard” to do. The point is this; determining market direction and finding trades is not hard, people make it hard. The difficult part of trading is controlling yourself via not over-trading, not risking too much per trade, not jumping back into the market on emotion after a big win or a loss, etc. In short, controlling your own behaviour and mindset, as well as properly managing your money are the hardest parts of trading, and traders tend to spend less of their time & focus on these more difficult aspects of trading, probably about 20%, when they should be spending about 80% of their time on them.
80% of profits come from 20% of trades
It’s absolutely true that most trading profits come from a small percentage of trades. for example if you keep your losing trades contained below a certain 1R dollar value that you are comfortable with, and you see what you consider an “obvious” price action signal with a lot of confluence behind it, You will go in strong or add to the initial position and make a nice chunk of change on the trade if the trade goes in your favour. The winning trades are typically double or triple the 1R risk you give up on any of losing trade. This way, even if you lose more trades than you win, You can still make a very nice return at year’s end.
80% of the time the market is not worth trading, 20% it is
Do you see the connection between the fact that most traders lose money (around 80%) and about the same amount of time the market is really not worth trading? Markets chop around a lot, and a lot of the time the price action is simply meaningless. As a price action trader, your job is to analyze the price action and have the discipline to not trade during the choppy (meaningless) price action and wait for the 20% or so market conditions that are worth trading.
This point is the most important: The main thing that separates the professionals from the amateurs in this business is patience and not over-trading. Traders tend to negate their trading edge by trading during the 80% of the time when the market is not worth trading. Instead of waiting for the 20% of the time when it is worth trading, they simply trade 80% to 100% of the time with very little discretion or self-control, like a drunk guy at a casino. Don’t let this be you, remember the 80/20 rule ESPECIALLY as it pertains to trading vs. not trading. If you think you are trading about 80% of the time, you need to evaluate your trading habits and make it more in-line with trading only 20% of the time and 80% of the time should be spent observing and keeping your hands in your pockets (not trading).
80% daily chart trades, 20% other time frames
The daily chart time frame chart supposedly is the “weapon of choice” as far as chart time frames are concerned. I would say it’s pretty accurate and won’t get into all the reasons why the daily chart to be specific as I do love my good'ol 15m/1h /4h charts, however it is worth pointing out that there is also a direct connection between the fact that most traders get caught up trading lower time frame charts and lose money. This fits well with the 80/20 rule in that probably only about 20% of traders really focus on higher time frame charts like the daily chart and somewhere around 20% to 10% of traders actually make consistent money. People tend to be drawn to the “play by play” action on the lower time frame charts, almost like they are mesmerized by the moving numbers and flashing colours…unfortunately, this turns into somewhat of a trading addiction for many traders, that quickly destroys their trading accounts.
80% of trading success is psychology and money management, 20% is strategy
In the previous idea I wrote a mini case study of random entry and risk reward, I showed how it is possible to make money simply through the power of money management and risk reward. To be clear, I was not and am not saying that you can make a full-time living as a trader without an effective trading strategy. I am simply saying that money management and controlling your mindset is far more important than finding some “perfect, Holy-Grail” trading system that simply does not exist.
You should be focusing about 80% of your trading efforts on money management and controlling yourself / being disciplined (psychology), and about 20% on actually analyzing the charts and trading. If you do this consistently, I can guarantee you that you will see a very positive change to your trading. Using an effective trading method that is also easy to understand and implement will give you the mental clarity and time to focus 80% on money management and discipline whilst only needing about 20% of your mental energy for analyzing the markets and finding trades. A lot of traders never even get to this point because they are still trying to figure out how the heck to make sense of their trading system.
The implication here is that you can eliminate about 80% of your losses and be profitable come end of year of being consistent. The first step to trading with an ‘80/20 mindset’ is to master a simple trading strategy like a price action strategy . As I said earlier, if you do this it will give you the foundation you need to focus more of your time on the real “money makers” in trading, which are money management and your own mental state. Thus, the 80/20 rule in trading is best applied by combining a simple trading strategy and a strong focus on money management and psychology, the synergy of this combination is a very potent force for making money in the market.
Rob Booker has a great well rounded video on Youtube on the topic also just search: THE 80/20 RULE FOR TRADERS (15:25)
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Trading is the ultimate “less is more” profession, but it’s also extremely difficult for most people to accepting the following:
80% of trading should be simple and almost effortless, 20% is more difficult
80% of profits come from 20% of trades
80% of the time the market is not worth trading, 20% it is
80% of the time you should not be in a trade, 20% you can be
80% of trades should be on the daily chart time frame, 20% can be other time frames
80% of trading success is a direct result of trading psychology and money management, 20% is from strategy / system
80% Simple, 20% Difficult
This one is easy. Most of what we do as traders is sit in front of our computers and look at prices going up or down or sideways. This is not by anyone’s standards “hard” to do. The point is this; determining market direction and finding trades is not hard, people make it hard. The difficult part of trading is controlling yourself via not over-trading, not risking too much per trade, not jumping back into the market on emotion after a big win or a loss, etc. In short, controlling your own behaviour and mindset, as well as properly managing your money are the hardest parts of trading, and traders tend to spend less of their time & focus on these more difficult aspects of trading, probably about 20%, when they should be spending about 80% of their time on them.
80% of profits come from 20% of trades
It’s absolutely true that most trading profits come from a small percentage of trades. for example if you keep your losing trades contained below a certain 1R dollar value that you are comfortable with, and you see what you consider an “obvious” price action signal with a lot of confluence behind it, You will go in strong or add to the initial position and make a nice chunk of change on the trade if the trade goes in your favour. The winning trades are typically double or triple the 1R risk you give up on any of losing trade. This way, even if you lose more trades than you win, You can still make a very nice return at year’s end.
80% of the time the market is not worth trading, 20% it is
Do you see the connection between the fact that most traders lose money (around 80%) and about the same amount of time the market is really not worth trading? Markets chop around a lot, and a lot of the time the price action is simply meaningless. As a price action trader, your job is to analyze the price action and have the discipline to not trade during the choppy (meaningless) price action and wait for the 20% or so market conditions that are worth trading.
This point is the most important: The main thing that separates the professionals from the amateurs in this business is patience and not over-trading. Traders tend to negate their trading edge by trading during the 80% of the time when the market is not worth trading. Instead of waiting for the 20% of the time when it is worth trading, they simply trade 80% to 100% of the time with very little discretion or self-control, like a drunk guy at a casino. Don’t let this be you, remember the 80/20 rule ESPECIALLY as it pertains to trading vs. not trading. If you think you are trading about 80% of the time, you need to evaluate your trading habits and make it more in-line with trading only 20% of the time and 80% of the time should be spent observing and keeping your hands in your pockets (not trading).
80% daily chart trades, 20% other time frames
The daily chart time frame chart supposedly is the “weapon of choice” as far as chart time frames are concerned. I would say it’s pretty accurate and won’t get into all the reasons why the daily chart to be specific as I do love my good'ol 15m/1h /4h charts, however it is worth pointing out that there is also a direct connection between the fact that most traders get caught up trading lower time frame charts and lose money. This fits well with the 80/20 rule in that probably only about 20% of traders really focus on higher time frame charts like the daily chart and somewhere around 20% to 10% of traders actually make consistent money. People tend to be drawn to the “play by play” action on the lower time frame charts, almost like they are mesmerized by the moving numbers and flashing colours…unfortunately, this turns into somewhat of a trading addiction for many traders, that quickly destroys their trading accounts.
80% of trading success is psychology and money management, 20% is strategy
In the previous idea I wrote a mini case study of random entry and risk reward, I showed how it is possible to make money simply through the power of money management and risk reward. To be clear, I was not and am not saying that you can make a full-time living as a trader without an effective trading strategy. I am simply saying that money management and controlling your mindset is far more important than finding some “perfect, Holy-Grail” trading system that simply does not exist.
You should be focusing about 80% of your trading efforts on money management and controlling yourself / being disciplined (psychology), and about 20% on actually analyzing the charts and trading. If you do this consistently, I can guarantee you that you will see a very positive change to your trading. Using an effective trading method that is also easy to understand and implement will give you the mental clarity and time to focus 80% on money management and discipline whilst only needing about 20% of your mental energy for analyzing the markets and finding trades. A lot of traders never even get to this point because they are still trying to figure out how the heck to make sense of their trading system.
The implication here is that you can eliminate about 80% of your losses and be profitable come end of year of being consistent. The first step to trading with an ‘80/20 mindset’ is to master a simple trading strategy like a price action strategy . As I said earlier, if you do this it will give you the foundation you need to focus more of your time on the real “money makers” in trading, which are money management and your own mental state. Thus, the 80/20 rule in trading is best applied by combining a simple trading strategy and a strong focus on money management and psychology, the synergy of this combination is a very potent force for making money in the market.
Rob Booker has a great well rounded video on Youtube on the topic also just search: THE 80/20 RULE FOR TRADERS (15:25)
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