Using the Pareto principle in trading

yonnie · 6 February 2010

sorry I must have misunderstood you......

I thought you were looking for particular aspects/conditions in a stock that had a chance of ending up in the 20% group BEFORE the strong price rise happened.

you must be looking at the aspects/conditions DURING the big move.

correct me if I`m wrong

tech/a · 6 February 2010

Trembling Hand said:
LOL tech you are a joke.

You are kidding yourself if you think that you actually apply Pareto principle.

You Don't Apply it. Its just the distribution of profit.

AND now seems many are attempting to apply the principal.

sorry I must have misunderstood you......

I thought you were looking for particular aspects/conditions in a stock that had a chance of ending up in the 20% group BEFORE the strong price rise happened.

you must be looking at the aspects/conditions DURING the big move.

correct me if I`m wrong

Been pondering this for a few days.

I agree that in this instance application in a practical sence cant be done. The Pareto Principal is as you say a distribution of profit.

Everything we do in an attempt to increase our higher R winners is not application of Pareto.

I guess the application is the knowledge that our profit in most things we do will always be skewed by the big wins and if not up with risk management also by those big losses. Dramatically so.

So protecting against catastrophic loss and placing ourselves in front of opportunity arent applications of the principal itself but reactions to the knowledge of the principal.

krk004 · 6 February 2010

yonnie said:
sorry I must have misunderstood you......

I thought you were looking for particular aspects/conditions in a stock that had a chance of ending up in the 20% group BEFORE the strong price rise happened.

you must be looking at the aspects/conditions DURING the big move.

correct me if I`m wrong

Not all my trades are winners, even with this 'filter'.

Can I provide a very simple (perhaps 'crude') example - say I trade Monday to Friday and after extensive search have found conclusive evidence (10+ years analysis) of which days provide my profit;

Monday - 80%
Tuesday - 30%
Wednesday - 20%
Thursday - (10%)
Friday - (20%)

Total - 100%

So I decide not to trade Thursday & Friday, result theoretical profit increase by 30% with 40% less effort.

Very simplistic, but in essence is what I am trying to convey.

So a filter that reduces my no. of losers, whilst still capturing the winners has made sense for me in my methods.

tech/a · 6 February 2010

Fine but you also find that on a Thursday/Friday you had a few trades which returned dramatically higher R multiple wins.
In fact those wins totalled nearly 40% of all your overall profits.
So you drop Thursday Friday?

yonnie · 6 February 2010

krk you must be daytrading then if taking trades on certain days is so important

krk004 · 7 February 2010

tech/a said:
Fine but you also find that on a Thursday/Friday you had a few trades which returned dramatically higher R multiple wins.
In fact those wins totalled nearly 40% of all your overall profits.
So you drop Thursday Friday?

I did say it was a crude & simplistic example.

Perhaps I should have just said Indicator A, B, C, D & E.

In a simplistic sense though, even with a couple of high R multiple trades with these providing 40% of profits, dropping Thursday & Friday made the overall system more profitable with less work.

Would you trade the 'Thursday & Friday' system as a stand-alone method with the previous results (even with some big R results)?

My original point was, using the Pareto principle in trading was about trying to identify what it was about the 20% effort (80% profit) that was different to the 80% effort (20% profit). Then seeing if there was a 'way' to spend more time with the former and less with the latter.

If you are making a profit with your own systems, what is making you that profit? Sheer luck or something else?

krk004 · 7 February 2010

yonnie said:
krk you must be daytrading then if taking trades on certain days is so important

Yonnie, not a daytrader and certain days are not important to me, was just a simple & crude example.

Although I do remember reading some years ago where a successful trader (Mark Cook?? - not sure) cut out a day in his normal week of trading because of a similar reason to the example I used.

All the best.

yonnie · 7 February 2010

I`ve heard of non-trading days in forex or trading on certain hours of the day, when most of the trend/volume occur, like the start of the European/American session.

does that also happen in stock trading?

Using the Pareto principle in trading

yonnie

tech/a

No Ordinary Duck

krk004

tech/a

No Ordinary Duck

yonnie

krk004

krk004

yonnie

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