In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal wealth in his country, observing that 80% of the wealth was in the hands of 20% of the population. Then, in a later generation, Dr. Joseph Juran observed a universal principle he called “vital few and trivial many”, or the principle that 20% of something is always responsible for 80% of the results. Hence, the now recognizable 80/20 rule. This rule has since been applied to various disciplines from science to business management. Can it also be applied to stock trading? I believe it can with a few slight modifications.
20% MAKE 80% OF THE MONEY
There will never be any hard numbers to back this up but I am fairly confident when I say that only 10-20% of traders consistently make money trading the stock market. And those 10-20% make 80% of the money. There are many and various reasons for such a low number, ranging from lack of capital, ignorance of the market’s own logic, emotional insecurities and weaknesses, to simple greed and fear. Is it any wonder then that system sellers, magic indicator promoters, and never lose strategy pedagogues attract such a large audience? 80% of active traders are looking for the answer to their road to riches and there are plenty of sources for that answer. However, the very best answer is often the one most overlooked, yet is stares back at us each day we look in the mirror. The 10-20% percent have the secret but they can’t sell it to us. Because it can only be found within ourselves. Now, do not get me wrong here. We do have to have a strategy for trading and solid rules to back up the strategy but the strategy is not the answer; it is the way we use the strategy that makes all the difference. This is no different in trading as it is in sales. When I was working in corporate America many years ago as a sales manager in charge of recruiting, only 10-20% of those I hired ever became truly successful. Those who were still around after six months either made most of the sales and six figure incomes or settled for making average incomes; hence 20% were making 80% of the sales (and money). The 10-20% are made of a different cloth. Not a better product; not a better manager; not a better suit. They have discipline, patience, confidence, conviction, focus, etc. that the others do not. Same with traders. The best traders are successful not because of a better platform, or better access to market information, or a secret indicator, or a silver spoon in their mouth, but as a result of the proper mindset that allows them to make money with the very same strategy that the unsuccessful use.
20% OF THE MARKET WILL MAKE YOU 80% OF YOUR MONEY
As a swend trader (swing/trend trader), I look for multi-dollar, multi-day moves based on very strict criteria (i.e., the crosshair). By its very nature, the high probability, swend trading opportunity is a rare occurrence. The markets rarely agree for any length of time but when they do a trend is created that can last from days to weeks to months, depending on the time frame traded. When the markets are in disagreement, usually noted by large daily and intraday price swings and consolidation there is no recognizable multi-dollar, multi-day trade opportunity. It is during these times that I choose to step aside. How often does the market trend versus consolidate? When looking at a DAILY chart I would hazard to guess 20% of the time. Therefore, I am in the market 20% of the time and it is during this time that I make 80% – 100% of my money, as I am rarely in the market during the consolidation period. I say rarely because I may not recognize the consolidation period until it after its initial phase and my trades fail to work (Please note: no one can be so good as to know when these periods begin/end). It is during the consolidation period that swend traders either suffer draw downs or choose to wait. The smart ones, the successful 10-20%, will choose to wait out the market knowing that the next trend will soon resume and the money will begin to flow into their trading accounts, accounts that were not ravaged between the trends.
Take a look at your trading account and you will likely notice periods of accumulation and periods of distribution, much like the market. If you are experiencing too many periods of distribution and not enough periods of accumulation then there may be a very good reason: you are in the market 80% of the time and are making money only 20% of that time.
Just a thought…and for some (20%)…just maybe…a revelation.
