Here are a few 80/20 principles which you’ve probably been applying to your entire life without even knowing it.
In business: 20% of your customers are responsible for 80% of your sales
With weight-loss: 20% of exercise and 80% diet is required to lose weight
Personal Relations: 20% of customers causes 80% of the complaints
Dressing: 20% of your clothes is worn 80% of the time
Marketing: 20% of your marketing outputs makes up for 80% of the results
Applications: 20% of your mobile applications are used 80% of the time
And that’s just to name a few. There are many other ways the 80/20 Principle can apply to your life.
Let’s get into it.
Keep this between us…
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But he’s finally making it public.
What is the Pareto rule and how to apply it with trading
Basically, in the late 1800's lived an Italian sociologist and economist -Vilfredo de Pareto – who discovered the ‘Pareto Rule’.
Vilfredo de Pareto found that 80% of a nation’s income was in the hands of only 20% of the population. (Which still applies today).
Richard Koch having studied the ‘Pareto Rule’, wrote a simplified and revised version called the ‘80/20 Principle’.
You might think 80/20 sounds like some complicated jargon term for business.
All the principle says is that you need to put in 20% effort and inputs to get out 80% of rewards, outputs and results.
In fact, the 80/20 principle is a phenomenon you’ve probably been applying to your entire life without even knowing it.
But today I want to show you how you can use it to profit more often from trading!
Why you only need 20% of indicators to profit with trading
Let’s start with the indicators to choose from with your trading platform.
On an average trading platform, there are around 30 indicators to choose from.
In my first few years of trading, I researched and worked on every trading indicator there was.
It got to the point where I added over 10 indicators all on one chart.
I had the impression that the more indicators I added on a chart, the more confirmed signals I’d see with each trade.
You’d think this is the holy grail to trading right?
The more indicators I added on a chart, the more conflicting signals I saw.
I saw buy and sell signals on the same chart. And this caused nothing but doubt, frustration and confusion.
I realized, you don’t need so many indicators to find a trading signal.
So here’s what I did. I took those 30 indicators and researched the mechanics behind them and what majority of traders in the world use.
And by surprise, the majority that traders use are only 6 indicators out of the 30.
20% of indicators out of 30 are used 80% of the time and by 80% of traders.
And with the 80% of traders using these 6 indicators, it becomes a self-fulfilling prophecy.
This means, it’s better to work with these few indicators and use them to identify strong buy and sell signals as the majority do.
These six indicators are the following.
These indicators might sound scary at first, it was to me as well.
But you’ll find that they all have two purposes.
Predict when to buy
Predict when to sell
But you’ll need to take your time and research these indicators one by one to find out how to do just that.
Master these few and forget about the rest. As Bruce Less said, "I fear not the man who has practiced 10000 kicks once, but I fear the man who has practiced one kick 10000 times."
20% of instruments are traded 80% of the time
There are over 200 shares to trade from on the JSE. But majority of the shares are dangerous to even think about.
They have a small market cap, low volume traded and extremely jumpy.
These are not the kind of shares you want to add to your trading watch list.
If you look at these dangerous shares you’ll see they are pretty much impossible to trade and fatal to your portfolio.
First the price between each dangerous share normally trades far too high or low from where the next bid or offer price is.
This means you’ll experience unnecessary slippage. Slippage is a technical term for saying you’ll get in away from the price you want to get in at where you’ll need the share price to move a whole lot more just for you to break even.
NOT WORTH IT.
And second, you’ll find that these listed companies are generally in the doldrums where they have a higher chance of facing liquidation, suspension or worse DE-LISTINGS.
So you want to avoid those shares by all means...
Fortunately, the 20% of shares you can trade are already available for you.
I’m talking about the JSE Top 40 shares. These shares have met my criteria for trading.
Criterion #1: Market cap exceeds over R20 billion
Criterion #2: Over 500,000 shares traded per day
Criterion #3: They are listed on the main board as the top Blue Chip companies
There is a huge amount of buying and selling, there is hardly any slippage, the charts are less jumpy and moves with beautiful trends. And these factors are just what you need to profit from trading.
These top 40 shares which are 20% of the JSE are also traded well over 80% of the time.
In fact, with Red Hot Storm Trader, I only look at trading within these top 40 shares at a time.
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Very soon, controversial new legislation will come into effect:
And it could cause the price of one little-known stock to explode.
Investors who move before then could see gains of as much as 120% in the next 12 months.
80% of the time the market is moving sideways and 20% we are profiting
Do you know what the majority of day traders do in their time when they trade in the world?
Markets don’t just fly up in straight line.
You hear the JSE only goes up just over 15% a year on average.
If it went up in a straight line throughout the year, we would see the JSE going up 100s if not 1000s of percent a year.
But it doesn’t. The JSE moves in a zig-zag fashion. In fact, we see the JSE trending 20% of the time and moves sideways 80% of the year.
So as a trader, 80% of the time you should be waiting and doing analysis for when the next trade lines up.
This is what I do with Red Hot Storm Trader. I wait for certain trading patterns to form 80% of the time.
And when the price breaks out into a trend that’s where I send out buy and sell signals to grab the short movement up or down to profit.
In the last, two weeks I’ve sent out two resource trades which one is in the money and one we banked for a 36% gain.
And the now the next resource trade is imminent and the 80% waiting period is nearly over.
Always remember, “Wisdom yields Wealth”