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Saturday, December 1, 2007

How To Improve Your Trading Skills

How To Improve Your Trading SkillsI believe every trader constantly asking that question on how he/she can take he/her the next level. I have found this rule very useful and universal, and yet not many people paying much attention on it. So I guess it could be an edge once you understand it and utiiize it fully.

Rule of 80/20. Once understand it, you can apply it to many areas and knowing where to focus your energy to get the max output.

Basically this rule states that 80/20 is the proper ratio for many things at final end.


1. In US 80% of wealth is control in 20% of population.
2. 80% of your income will come from 20% of your skill set.
3. Freeway usage, 20% of the time will contain 80% of the traffic. (traffic jam)
4. 80% of the market volume came from 20% of the people.(Institutional involvement)

But a lot of time the ratio could be 90/10, 70/30 or 60/40. Basically the idea is that things are not evenly distributed as 50/50, there is bias toward one side and the ratio of 80/20 usually can give very good approximation.

As an individual trader, how can we improve our end result base on this rule.

Basically, once you got enough data, you can then find out which system fit under this rule, then improve on this system

For example: you have 5 different systems. and one of them performs better then all other 4 systems, and produce the 80% of your profit. Then by increase position size on this system, you will be able to produce much bigger result.

Come to think of it, the famous turtle trading system utilize this concept well. Turtle system will add to a position when the trend is on its side, then keep adding positions until the market go against it.(but it dose have a max size allow for each position).

So in other word, when it catch a trend, it will capitalize on it. even with a 30%-40% winning ratio, turtle system was able to get an good annual return for its investors.

These are some the best traders who max out this 20/80 rules. when that 20/80 ratio show out, capitalize on it will improve your trading result dramatically.

PS: I do not recommend people to just using trend-following system, especially on intra-day bases. These are just meant to be an example. Basically trend-following system needs a lot of money and nerve of steel, and most people just do not have that combination.(my opinion on trend-following system)

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