Over a century ago, Italian economist Vilfredo Pareto learned that 80 percent of the land in Italy was owned by 20 percent of the population. To his surprise, he also discovered that other countries had a similar distribution.
Years later, a noted business consultant familiar with Pareto's work made his own discovery: 20 percent of his peapods contained 80 percent of the peas.
He also learned that the 80/20 rule applied to business: 80 percent of a company's profits results from 20 percent of its services or products.
The quality management expert named this the Pareto principle. It's also known as the law of the vital few: 20 percent of your business activities (the vital few ) will often be worth more than the other 80 percent combined. He advised his clients to mainly focus on their most valuable 20 percent of activities.
Besides business, the law of the vital few applies in other areas of life. Here are a few examples:
- 20 percent of computer bugs are responsible for 80 percent of the crashes
- 20 percent of the people in your address book get 80 percent of your phone calls
- 20 percent of beer-drinkers consume 80 percent of the beer
- 20 percent of students take up 80 percent of an instructor's time
- 20 percent of the roads in town get 80 percent of the traffic
- 20 percent of the clothes in your closet are worn 80 percent of the time
- 20 percent of motorists are responsible for 80 percent of the wrecks
- 20 percent of a baseball team's players will make 80 percent of the hits
The law of the vital few can sometimes be represented in ratios like 95/5, 90/10 or 75/25. But it's remarkable how often an approximate 80/20 ratio applies in business and in life.
What's more, evidence strongly suggests that the Pareto principle also applies to trading. But having this knowledge is not enough if you want to increase your chances for winning trades. You need to know more.
Professional trader Dick Diamond learned early on in his career that high-probability trades don't come around often, so when you spot one, you should be ready to act right then.
Though it's not the Pareto principle, per se, Dick has a rule of his own that recognizes and embraces its essence. Coincidently, Dick calls his rule the 80/20 trade -- that is, he only takes trades where his odds of winning are at least 80%. Dick says that on the intraday timeframe -- 2- to 10-minute charts -- he finds at least two 80/20 trades per day, on average, giving him a couple solid opportunities each day.
Taking only these 80/20 trades is one of the biggest secrets to Dick's success during his 45-year career. His 80/20 rule is so important, in fact, that it's one of the first things he teaches his trading students.
You see, Diamond made copious notes of his trades during his 45 years of trading experience. At long last, he learned the specific set-up for the 80/20 trades that made him a success for the past 45 years and counting.
Career trader Dick Diamond teaches you how to spot the vital few in his exclusive 4-day Market Mentor Trading Course.
Imagine how your portfolio could benefit by only trading those top-tier set-ups. You'll be like a baseball team owner with only the best hitters.
Dick Diamond's next Market Mentor Trading Course is July 22-25, 2012, in Orlando, FL.