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2 Oct

The 80/20 Principle Applied to Trading


How many times have you been bored… tirelessly staring at your screen… looking for trades, and just for the fun of it, get into a bunch of random stocks?

That’s happened to me in my early days… trying to make a quick buck using random strategies that didn’t have proven win rates.

I was trying to do everything… and there was an “invisible” rule that was in play here — the 80/20 principle (more on that later) — and that ended up costing me money.

Of course, things snowballed and got worse than I expected… and I said enough is enough… went back to the drawing board… and found my top 3 patterns for trading small-cap momentum stocks.

Things were going great… but at some point, trading slows down… and it’s hard to sit on your hands for extended periods of time.

What typically ends up happening is you try to kill time and “maximize” your profits by trading more… exactly

I reverted and tried to take on more trades to fill up my time… but this time, it was different. I was buying calls and puts (often on IWM — the small-cap ETF — and large-cap stocks)… and I was getting crushed…

… that continued for about 2 years (but I was making money overall, so I didn’t really pay attention).

However, in 2018… I was hit with an anvil — as my losses buying options overshadowed my stock trading. Thinking back, I could’ve saved so much money…

… and I realized how the 80/20 rule comes into play when you’re trading stocks.

I want to show you how you can use the 80/20 rule to your favor and provide you with some tips to efficiently maximize your profits.

80% of your profits come from 20% of your trades

That’s essentially what the 80/20 principle boils down to in trading terms.

But let me give you a little background of how this principle became a mindset and how you can use it to stay focused on your bread-and-butter setups.

The 80/20 principle — also known as the Pareto Principle was discovered by an obscure Italian economist — who discovered that 80% of the land in Italy was owned by 20% of the population.

In other words, 80% of the results stem from 20% of the actions.

Of course, those statistics will sway back and forth… but the whole idea is that a handful of strategies and patterns will produce a bulk of your returns… and everything else in between is costing you money.

So how do you get to a point where you maximize your returns by focusing on just a few setups?

It’s simple…

… and starts with journaling your trades.

Detail Your Trades to Boost Your Profits

Whenever you place a trade, keeping a journal will help you track your results.

In that trading journal, the most basic details to include are:

  • Date — Symbol — Profit or Loss
  • Your edge in the trade. The system or strategy that provides you with an advantage over other traders.
  • Type of trade. If you have multiple strategies, it’s best to categorize them.

You can put this into a spreadsheet or write them out by hand… it’s really up to you.

The whole idea here is to find your winners and losers… and rank your strategies so you know what to focus on.

Here’s a look at a basic journal entry in a trade I had recently,

Sept. 9, 2019

I bought shares of Glu Mobile Inc. (GLUU) for a swing trade.

My edge in the trade was my fish hook pattern — the stock had a massive drop… and found some support… and bounced.

This is part of my small-cap momentum strategy… and I came out with a $5,000 profit.

This is the simplest way to journal your trades… but you could include as many details as you see fit.

You might consider including:

  • Entry, target, stop-loss area
  • Whether you stuck to your plan
  • What emotions were you going through when you took the trade
  • How has the strategy been working in the current environment

When you track your performance, it’s so simple to figure out what’s working and what’s not.

Once you find the strategies that are costing you money… just cut them and focus on your best ideas.

For me personally, I had to get an accountant to go through my trades after my debacle in 2018 when I nearly destroyed my account by purchasing calls and puts.

Long story short… the statistics told me to stop buying calls and puts… and to start trading less until I came up with a new strategy.

So that’s what I did… I focused on my small-cap momentum strategy for most of this year… and I’m having one of the best performances in my entire career so far.

I used the 80/20 principle to my advantage…

… and I built my confidence back up with my stock trading strategy, and I knew I could be a good options trader too if I put my mind to it.

I looked back through all my trades — and that’s when it hit me… someone was making money off me, and I just needed to figure out a way that would stack the odds to my favor.

So I simplified options trading and developed a strategy that doesn’t require heavy math.

The best part: the strategy has a high win rate and anyone can learn how to use it.

If you want to see how you can use my unique options system that could double your income in as little as a few minutes per week… Click here or below to watch the exclusive video.

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