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If you are not familiar with the principles of production management, you probably haven’t heard of the Pareto chart. It’s a very effective tool that managers use to manage and influence performance in manufacturing environments. You say: how the heck is this going to help my sales? Well, it can, if you use it properly.
Another name for Pareto charts is management by exception. This allows you to focus on problem areas and then try to change those areas to get different results in the future. With this chart, you quickly notice the weakest areas in your trading. On the other hand, you also identify your strongest ones. This allows you to put maximum effort into the areas where you need the most improvement.
To build a Pareto chart for trading you should start with 3 columns and 12 rows. Place the words: System, Psychology, and Emotions at the top (one in each column). This chart will be used with a trading journal. You should all keep a trading journal, and you can also enter information from previous entries into the journal.
Three things directly affect your trading, they are now listed at the top of the Pareto chart. After listing the trades in the side rows. Mark in the column that corresponds to the main reason why you think the trade was a success or failure. After listing, look at the transactions that failed. You are likely to see a pattern of the same reason again and again.
With this simple chart, you have quickly identified your main weakness. With this knowledge, you can analyze the problem and create solutions to change this outcome. A valuable tool for doing this is called root cause analysis.
