Thread: The 80/20 rule in forex trading

The 80/20 rule in forex trading
The 80/20 rule in trading
Most people have probably already heard of the "80/20 Rule", but let me give you a brief description. Wikipedia article about it reads: "This rule is named after Italian economist Vilfredo Pareto, who noted back in 1906 that 80% of land in Italy belonged to 20% of population. Then, he formulated the principle by noticing that 20% of the pods in his garden contained 80% of the peas." "The 80/20 rule is popular in business, sales, economics, and many other fields. However, here we will discuss how the "80/20 rule" works in commerce, and how much of an impact it can have on your trading results on kalender ekonomi

Actually, the "80/20 rule" is not an exact science, but it does give us a very effective way to make sense of many aspects of trading and how they all work together. In addition, all of the 80/20 ratios we will be discussing should be taken as approximate, in other words - it could be 75/25 or 90/10, etc. As Jaro Starak, one of the contemporary researchers of the "80/20 rule," rightly pointed out, "These numbers mean that 80% of your results come from 20% of your efforts. As Pareto demonstrated in his research, this "principle" works in general, but in many cases, the ratio can be much higher - for example, 99/1 may be closer to reality."

In trading, the "80/20 rule" is more like 90/10 or sometimes even 99/1. You often hear that "90% of traders fail, while only about 10% can consistently make money." While the exact ratio of traders is almost impossible to determine, it's likely to be somewhere between 80/20 and 95/5. Have you ever wondered why trading is so difficult that 80% or 90% of people fail here? Trading is a field where "the less the better," but that fact is extremely difficult for most people to grasp. In other words:

80% of trades should be simple and easy, and only 20% should be more difficult;
80% of the profits are provided by 20% of the trades;
80% of the time in the market should not be traded, and only 20% can be traded;
80% of trades should be made on the daily chart, and only 20% can be made on other time scales;
80% of trading success is a direct result of trading psychology and money management, and 20% is a result of strategy/system.
Let's take a closer look at each of the above points and see how you can apply this to your trading to improve it.

80% simple trades
This one is easy enough to explain. Most of what we do as traders is to sit in front of our computers and watch quotes go up or down. There is nothing complicated about that. Even if you show a 5-year-old a price chart and ask him which direction the price will move, he will probably be right in his assumptions more often than not. Hence the conclusion - determining market direction and finding trades isn't that hard, people make it hard on themselves.

The trading strategy you use should not involve complex computer algorithms, wave theories, or interpreting a bunch of indicators. In fact, most traders try every method until they quit trading altogether or find out they are just overcomplicating what should be a very simple process.

The hard part of trading is self-control so that you don't fall into excessive trading, don't exceed the amount of risk per trade, don't jump into the market on emotions after a big win or loss, etc. In other words, managing your own behavior and mental attitude, as well as managing your money properly is the hardest part of trading. And traders tend to spend less time and attention on these more difficult aspects of trading (about 20%) when they should be spending about 80% of their time doing it.
The main profit is provided by a small number of trades
One of the most common "sniper trading" strategies that involves patiently waiting for high probability trade setups, rather than the high frequency trading style that has led so many novice traders to complete ruin. It is absolutely true that most trading profits come from a small percentage of trades. A competent trader prefers to keep losses on losing trades below a certain bar, which is quite comfortable for him, and if he sees an "obvious" signal of price action with a good confirmation, he will enter a strong volume and will increase the trade if it goes in his favor. His profit on winning trades is usually double or triple the loss on any of the losing trades. In this case, even if he has more losing trades than winning ones, the trader can still get a very good return at the end of the year.

You should not trade most of the time
Most traders like to trade with high frequency, and by "strange coincidence" about 80-90% of them lose their money. They lose money because they trade forex too much and are not patient or disciplined enough to wait for their strategy to actually work and give them a high probability entry signal.

Do you see a connection between the fact that most traders lose money (approximately 80%) and that the same amount of time the market is really not good for trading? Markets fluctuate a lot and looking for price action signals just doesn't make sense. As technical traders, we must analyze price action and have the discipline not to trade during periods of volatile (meaningless) market conditions and wait for the 20% of market conditions that are actually worth trading.

This point is very important. The main thing that separates amateurs from professionals in this business is patience and adherence to the trading regimen. Traders tend to lose their market advantage by trading those 80% of the time when the market doesn't deserve it. Instead of waiting out the 20% when it is worth trading, they simply trade with very little confidence or self-control, like a drunken casino player.

Don't be like these traders, remember the 80/20 rule, especially when it comes to choosing to "trade or not to trade." If you think you trade about 80% of the time, then you must evaluate your trading habits and adjust them to trade only 20% of the time, and 80% of the time should be spent observing the market from the sidelines.

The main trading should take place on the daily chart
The daily scale is my "market weapon. There is a direct correlation between the fact that many traders trade on smaller time frames and the fact that most of them lose money. This fits well with the 80/20 rule, as probably only about 20% of traders actually focus on the larger time scales (like the daily chart), and about 10-20% of traders actually make money consistently. People tend to be sucked into the "game" on the smaller time scales, as if they are hypnotized by the movement of the quotes. Unfortunately, this turns into a sort of trading addiction for many traders, which quickly destroys their trading accounts.

The lion's share of trading success comes from psychology and money management, and only a small amount from strategy.
In fact, money can be made simply through effective money management. Let's be clear right away - we're not saying you can trade for a living without an effective trading strategy. Managing your money and controlling your psychological state is far more important than finding some "perfect" trading system, which simply doesn't exist.

You should focus approximately 80% of your efforts on money management and self-control/discipline, and approximately 20% on actually analyzing price charts. If you do this consistently, you are guaranteed to see positive changes in your trading results.

Using an effective trading method that is easy to understand and apply will give you the clarity and time you need to focus 80% of your efforts on money management and discipline, and only about 20% of your energy will be needed to analyze markets and find trades. Many traders never even think about this because they are still trying to figure out how to build a super-efficient trading system.

If you look at your trading account history from the beginning of the year, ask yourself how many trades you lost money in, where the actual reliable signals of your trading strategy were versus those random trades you made on emotion or impulse. The ratio of emotional losses to losses that were the result of normal statistical system parameters is 80/20.
This means that you can eliminate approximately 80% of your trading losses by avoiding emotional or impulsive trading. The first step to trading the "80/20 rule" is to fine-tune a simple trading strategy. If you do that, you'll get the baseline you need to devote the bulk of your time to the real "sources of money" in trading, which are money management and your own psychological state.

Thus, the "80/20 rule" in trading is best applied by combining a simple trading strategy and a high concentration on money management and psychology, because the synergy of this combination has a very powerful effect on making money in the market.