Per Investopedia, The 80-20 rule, also known as the Pareto Principle, is an aphorism which asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event.
The biggest problem facing losing traders is that 80% of their losses come from 20% of their trades. Or they often lose VERY big.
Below you will find trade a series of real trades I took during a period of time. My trading strategy during this period included a MAX RISK of $300.
As you can see from the journal, I exceeded my $200 risk on 4/27 trades or 15% of my trades. My win rate was pretty good at 13/27 or 48%. Yet, my total return was only $897. Had I simply cut those 4 losing trades at $300, I’d have a return of $7,215. That is more than an 800% increase.
Keep in mind, these trades were over the course of 16 trading days. Imagine I had traded this way for a full year, assuming I did not blow up my account with this type of recklessness.
Not sticking to my $300 risk would’ve resulted in a ~$13,455 return vs a return of $108,225 using max risk of $300.
I don’t care if you think your trade still has a shot. If your risk is hit, then get out and start fresh.
One thing I know for certain is an account wrecking trade feels a hell of a lot worse than 200% win feels good.