After looking over my last post on the 80/20 rule and also having a discussion with a fellow trader, I’ve decided to write this short post in order to add one more angle to the 80/20 rule, and more specifically, how it relates to – to what I found to be – the best staking staking system and namely the Kelly criterion.
I will not go in full details on the Kelly system, but for those of you who are not familiar, here it is in a nutshell. Your stakes – or the risk you take – are in direct proportion to the probability of your bet or outcome, happening. So the higher the probability, the higher your risk should be and on the flip side, if your probability is low, your stake or the risk you take, should be adjusted accordingly. Or in other words, the higher the value or edge you have the higher the percentage of your total bankroll that you should commit, and if there is no value or edge then there is no bet.
Now, how does this fit in with the 80/20 rule ? [click to continue…]
“How to make more money while trading less” could have been a suitable title for this post as well, because that is what the 80/20 rule is all about, doing or achieving more while working or committing less resources.
What is the 80/20 rule?
Before we go into how the 80/20 rule will help you make more money by trading less, let’s begin by talking a little bit about how this principle got born, what it is, where is it used and why it is so powerful. The 80/20 principle is also know as the law of vital few or the Pareto principle, named after the Italian economist Vilfredo Pareto (1848-1923), who came across it while making research into different patterns of wealth distribution in Italy, discovering that the wealth distribution was very unequal, with 80% of the land being owned by only 20% of the population. This 80/20 pattern that he discovered, turned out to be a predictable pattern that could be charted out and expressed in a formula. He created a relationship between two distinct sets of data, in his case, the total amount of land or wealth and the total population.
[click to continue…]