The 80/20 Trade: Pounce Like a Cat

(Legendary trader Dick Diamond passed away in 2015. This interview with Dick was conducted in 2011.)

Copy the tiger when stalking and capturing a “pounce-ready” trade.

Tigers know that the prey they covet is elusive: They show great patience and care when stalking the target.

I came across this description of the tiger’s technique:

When hunting, this cat may take twenty minutes to creep over ground which would be covered in under one minute at a normal walk … the tiger will sometimes pause … move closer and so lessen that critical attack distance before finally raising its body and charging.

They wait until a victim comes close and spring up. This ambush method of hunting uses less energy and has a greater chance of success.

You must ambush high confidence trades. Long-time professional trader and teacher Dick Diamond says patience is vital before the ambush.

I talked to Mr. Diamond about his famous 80/20 trade, which he means literally — he says it has at least an 80% chance of success. It’s the only trade setup Mr. Diamond will take.

Diamond’s Methodology and Advice on Discipline and Trade Execution

Q: Trading is such a tough business that it usually does people in long before 45-plus years pass. If you had to point to one thing that has kept you in the game all these years, what would it be?

Diamond: Discipline. It’s as important to trading as location is to real estate.

Q: You talk about your trading principles. What are a few that every trader should be aware of?

Diamond: One thing is to trade within your capital. This is essential to being effective on a long-term basis. It’s better to trade small to win small and possibly even trade small to win big. That’s how you keep your pulse rate and heart rate low. You can think well because you haven’t stuck your neck out there. Unfortunately, a lot of people trade big to win big or even trade big to win small. That just ends badly. Be conservative, be disciplined, and if you trade just a small amount of your capital, you’ll be successful.

Q: Could you tell me about the 80/20 trade?

Diamond: The 80/20 trade is based on indicators that create a specific trading setup. A trader must act on this setup immediately. You must wait, and then pounce like a cat when the opportunity presents itself. Then you set stops. In shorter time frames, like trading from a five-minute chart, the 80/20 set up may come along a few times a day. Sometimes the indicators reveal what I call 90/10 or even 95/5 trades.

Q: What emotional factors do traders need to work on the most?

Diamond: Traders must be calm and confident. You can’t be a Nervous Nellie and succeed at trading. Calmness comes from learning the proper trading techniques.

Q: What’s different about trading today vs. when you started out in the 1960s?

Diamond: When I started trading, execution took up to five minutes — now it takes less than a second. Time is money, so computers provide a great advantage to today’s trader compared to pre-computer days. At the same time, while computers allow the trader to see multiple indicators on the screen, one must avoid indicator overload. One must learn to narrow down the number of indicators.

Q: Students spend the last half of your course applying your principles and methodology in real-time trading. This must be a tremendous value to the students.

Diamond: This is a 3-section course. The first section is academically oriented. But it’s stuff you’re not going to get in an ordinary trading course. During section 2, I explain my indicators and how to use them. In section 3, I trade live in front of them.

Editor’s note: In the current version of the course, Module 3 is comprised of live, pre-recorded virtual trades executed by EWI’s former Head of Education, Wayne Gorman. The course, hosted by EWI’s Vadim Pokhlebkin, also has Module 4, “Advanced, Optional Trading Techniques.” Currently, it describes a technique called “Fast Entry.”

For the most part, it’s worked out well. My trades are successful about 70-80% of the time. But, I am a human and have to take losses every once in a while. But bad trades give me the opportunity to show students how to close a position out quickly.

I teach students to look for an 80/20 trade. That means that you should feel in your gut that you have a 4 in 5 chance of winning as the trade sets up. People fail as traders because they take these 50/50 or 60/40 trades that look “okay.” You can’t really make any money on a long-term basis making trades like that.

Q: A skeptic might say that your trading can’t be that great, or you’d keep it to yourself. Your trading is not just great; it’s legendary. Why do you feel so strongly about teaching others?

Diamond: I just enjoy training people. The original live course was only a four-day period. I did it for a while in 1987 and part of ’88 and Bob Prechter recommended a lot of people to me. It was very fruitful on a personal level: I met so many people through those courses. I was doing it every week and finally realized I really wanted to get back to trading because I had gotten away from trading completely. Now I get to have my cake and eat it too. I’m still a full-time trader. Trading is what I love to do and what I want to do. I trade, but now I can still take time out for the course to teach other people. It’s very fulfilling.

For Serious, Committed Traders Only

Learn how one man, patiently and consistently, took home his “piece of the market pie” almost every day for 48 years.