What is the 80/20 Concept, and How Did it Start?
The 80-20 rule has a variety of practical applications in several fields such as wealth distribution in economics, quality production control, company sales, and growth. Vilfredo Pareto developed the 80-20 rule in Italy in 1906. Pareto, an economist, discovered that 20% of the pea pods in his garden yielded 80% of the peas. He then calculated that 20% of Italy’s people owned 80% of the land. The 80-20 rule’s use has subsequently grown beyond its purported humble origins in Pareto’s garden.
The 80/20 Rule in Trading
In the trading sector, the 80-20 rule is often used. As a trader, you may discover that your greatest earnings come from trading a single currency pair or stock. Trading firms may discover that 20% of their traders generate the majority of their earnings. Similarly, businesses may discover that trading a single asset type, such as equities and cryptocurrencies, generates the majority of their revenue.
The 80-20 guideline can also be applied to the trade day or season. For example, you may discover that you earn 80% of your money in the mornings or in the first part of the year. It is important to note that 80-20 is only a starting point. The ratio may be adjusted to 70-30 or 60-40.
How to Apply the 80/20 Rule in your Trading
1. Avoid short-term trading, such as Forex day trading. You trade frequently in day trading, but it simply does not work. This is because all short-term volatility is unpredictable – and the chances are never in your favor.
3. Increase your risk for each transaction on “excellent deals” – up to 20% is OK. Remember that risk and reward go hand in hand, and you must take substantial measured chances when the odds are in your favor.
4. Don’t try to diversify! Forex traders believe that this spread reduces risk, but it actually dilutes profit.
Principles of the 80/20 Rule
#1: Trading performance – You can analyze these relationships:
- Is it true that the majority of losing trades are the result of the same error?
- Is the majority of your loss due to a few trades?
- Is the majority of the loss due to a limited number of days?
- The same questions may be posed about winning trades and earnings.
#2: Individual performance – You can analyze these relationships:
- How much time is spent on each job, and what advantage does it provide?
- What are the most important duties in my trading that provide the best results?
- What actions will have the most impact on my results?
#3: The market – You can analyze these relationships:
- The market is in the middle of a move (not reversing) 80% of the time, and it is creating a top or bottom 20% of the time.
- The market is not trending 80% of the time, and it is trending 20% of the time; 80% of market changes are noise, and 20% of market moves are a genuine signal; the market is in consolidation 80% of the time, and it is on an impulse 20% of the time.
#4: Strategy performance – You can analyze these relationships:
- Is it true that the bulk of trade changes come at the same stages in the strategy?
- Is the bulk of my success due to a small number of the same entry type?
- Do the bulk of my filters have a negligible effect on performance?
- Is it true that a subset of my tools and indicators have the greatest beneficial influence on the strategy?
Reduce Efforts and Increase Rewards
Focusing on the aforementioned will earn you more money, but it will also minimize the amount of work you put in. Change your focus to long-term trading, and only trade the best indications. Your burden – and the amount of time you need to spend on Forex research – will be decreased as a result. If you use the 80 – 20 rule to your Forex trading in the manner described above, you will reduce the amount of effort you put in. You’ll also improve your earnings, which is what many Forex traders want!
Many individuals believe that the more work you put in, the greater your outcomes will be. This is true in many aspects of life – except for Forex trading! You are only compensated for being correct with your Forex trading signals.
Also, don’t believe the notion that the more you trade, the higher your chances of success in Forex trading. This is just not true because huge transactions with the best risk-reward ratio don’t come up very often. Incorporate the 80/20 rule into your Forex trading technique and watch your earnings skyrocket.