The 80/20 Rule for technical analysis, slow down and think.

Discussion in 'Stock Market Education' started by khalfani, Apr 24, 2014.

  1. khalfani

    khalfani Member

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    Many people have heard of it but I should just share it here anyway.

    Basically the 80/20 rule is based on a concept that few imputes scout for a large majority of outputs. This is expressed most famously in the global wealth gap where only 1% of the population controls 40% of all wealth.

    This is gap between inputs and outputs can also be found between what people work at and what they actually accomplish. For example, when some people are supposed to work on a task online they get sucked into a void of social media, video or forum browsing and most of the time they delegate to working is actually spent procrastinating.

    The reason Iā€™m writing this is to first say that you need to stop procrastinating, and this rule can be applied to trading as well. On average around 80% of the most profitable setups come from 20% of the signals. So what I suggest is that you slow down when trading.

    As we all know making a quick decision can be difficult especially when trading. so if you are new to the markets you should try going up a time frame and slowing down to think about why you take a specific trade, or more so why you should not.
     
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  2. wanderingwildman

    wanderingwildman Well-Known Member

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    I am totally guilty of procrastinating myself. I am actually here putting off some articles I am working for an online publication.. ha ha. .I definitely have more success when I just do it!
     
  3. Peninha

    Peninha Senior Investor

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    I think it's interesting when you say that: "On average around 80% of the most profitable setups come from 20% of the signals. So what I suggest is that you slow down when trading". What do you mean by this, we need to pay attention to 20% of the signals only? Which ones? :)
     
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  4. Strykstar

    Strykstar Well-Known Member

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    The core idea is that only 20% of the opportunities will generate 80% of the profit, so take it easy and think long and hard before each decision, as the odds of it being profitable are low.
     
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  5. Thejamal

    Thejamal Guest

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    You can pretty much apply this rule to anything. If we slow down and think about our decisions, we're bound to probably make better ones.
     
  6. wanderingwildman

    wanderingwildman Well-Known Member

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    Social media is another big one to use the 80/20 rule. You see so many people posting way more than they comment. We become so self-absorbed that it is scary.
     
  7. PvtParts

    PvtParts Guest

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    The law of the vital few says that 80% of the effects come from 20% of the causes. I never formally encountered this principle before but I've derived it many years ago independently. I feel proud!

    Also, that's incredibly motivating, @khalfani! Thank you!
     
  8. Strykstar

    Strykstar Well-Known Member

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    Pretty impressive coming up with it on your own, especially the same exact percentages, well done!
     
  9. Gelsemium

    Gelsemium Senior Investor

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    I am not surprised by this to be honest, if it was easy everyone would be investing and having success. I think that a 5 to 1 ratio is a realistic perspective of the ones who succeed, so take your time indeed, it's your money and eventually future on the line.
     
  10. Strykstar

    Strykstar Well-Known Member

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    That's true, the path to success is full of failures, you just have to learn to forget about them and focus on your next goal, if that one fails too, go for the one after that.
    I think succeeding 1 in 5 times is pretty good odds, I don't think we can hope for more than that, other than being lucky.
     

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