Trade Ideas Blog
The Pareto Principle in connection with stock trading using Trade Ideas
May 19, 2017
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[This guest post is by Alexander Voigt from DAYTRADINGz.com]
The Pareto Principle in connection with stock trading using Trade Ideas
The Pareto Principle, named after Vilfredo Pareto, also known as the 80/20-rule, says that 80 % of the results are achieved with only 20 % of the total efforts. To reach the remaining 20 % of the results, 80 % of the efforts, representing most of the work, are needed.
Vilfredo Pareto investigated the allocation of land ownership in Italy. He found out that about 20 % of the population possess approximately 80 % of the complete land property.
- 80 % of the city population of every country live in 20 % of the towns.
- In 1989 it was detected that 20 % of the total population own 82.7 % of the total assets of the world.
- 80 % of the turnover of companies are reached with 20 % of the products.
Which similarities are to be found in terms of stock trading and how is Trade Ideas able to help to trade more efficiently?
Every private investor knows it. With just one glance at the historic profits and losses it is easy to realize that in general only a few significant profits and losses are influencing the development of the portfolio.
If private investors use a well thought-out money management, then there will mainly be 3 main categories of completed trades:
- Trades that have been completed with a small loss
- Trades that have been completed close to +/-0
- Trades that have been completed with high profits
Usually, there are no significant high losses to be noticed. What is the reason for this? Every private investor knows the wise saying for stock traders: “Cut your losses short, let your profits run.” It is also well known that with every trade the relation between opportunities and risks should be better than 1:1. This means that the difference between the entry price and the profit target to complete the trade should always be bigger than the difference between the entry price and the stop loss.
With high probability, the two situations mentioned above will lead to the result that 80 % of the trades or even more will be completed close to +/-0 or with a small loss while 20 % of the trades or less will result in sustained profits.
So far, so good. But how is Trade Ideas able to help?
Private investors are not machines. Emotions are always part of the game. Frequently, emotions are the reason why traders have to face losses in their career. And very often, two of the main reasons for this are the lack of discipline and missing or incorrectly used time.
Please, ask yourself the following questions: When you plan to enter a trade, how much time do you spend with analyzing charts or fundamental data? And how much time do you use for managing the trade?
It is very likely that you will use – or more precisely, waste – 80 % of the time to initiate the trade and 20 % of the time to manage the trade. Is this effective? Most likely, not. This is not effective at all if you could spend this time in a much more useful way. Just think about it how much more you could make out of the time you have if you would only use 20 % of it to search for trading opportunities. How would you feel if you could keep or even improve your level of profits while you are able to reduce your time efforts in a significant way? Wouldn’t this be a great change? With or without considering the Pareto Principle, the time you save will:
- reduce stress,
- open new opportunities and
- make stock trading more effective and more efficient.
Trade Ideas’ artificial intelligence engine is capable of helping you get your time management under control. Trade Ideas calls its artificial intelligence HOLLY. Every day, HOLLY is searching for the best possible trading strategies. For a private investor it would be completely impossible to evaluate, quantify, and backtest these trading strategies in a reasonable amount of time.
And this is not all. On the day of the trade, HOLLY shows exactly when a trading signal is triggered for a stock. Of course, HOLLY also shows us the entry point and the entry price.
This time saving is particularaly advantageous for day trading and swing trading. And Trade Ideas adds another benefit for the active trader. The recently added integration between Trade Ideas and Interactive Brokers via the Brokerage Plus module allows trades to be executed automatically. So theoretically, the investors may relax and lean back while their computer does the work for them.
So, what kinds of advantages does artificial intelligence give stock traders?
Following your money management strategy improves performance, emotions get in the way of sticking to the strategy. Finally, Trade Ideas offers private investors the opportunity to catch up with the institutional traders and to exclude their emotions as far as possible while they are trading. During the entry, the management and the completion of a trade this reduces the error rate in a significant way. To hold on to the example mentioned above, this means if 20 % of the total trades go on being responsible for the actual performance of the portfolio, the use of artificial intelligence helps to avoid high losses being caused by emotions within these 20 % of the trades.
In addition to this, the investors will spend significantly less time working with their computers to evaluate possibilities for promising entries. This helps to increase efficiency. Time saved may be used to scale the profits by realizing further trade opportunities or simply to spend more time with family. In any case, the lower time pressure contributes to bringing stress levels down. So, this reduces the probability of mistakes being caused by thoughtless trade decisions resulting from too much stress.
To meet the Pareto Principle, every private investor should be focused on the target to earn the highest possible profits with as little effort as possible. But it also means that it isn’t worth it to waste the remaining or gained time with trying to make a few cents more. On the contrary, this time is much better spent on something else.
By the way, in 2016 HOLLY performed significantly better than the overall market. And the Trade of the Week, selected with artificial intelligence, likewise outperformed the markets.
Subscribe to Trade Ideas now and save 15 % right away! Visit my page at Trade Ideas to get the active code.
And don’t forget to Sign up for the free Trade of the Week!
This guest post was provided by DAYTRADINGz.com
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