Have you ever encounter the term, Pareto Principle?
If you have, then do you know it can help you in Forex trading. In this guide, we will reveal all about the Pareto Principle.
What is the Pareto Principle?
Pareto efficiency or Pareto principle (80/20), is after the name of the economist who found it. This pattern was observed when Pareto calculated that 80% of the land belongs to 20% of the population.
Now we can often observe compliance with this proportion in almost everything, and this ratio doesn’t need to be preserved precisely in a given proportion. The fact is that a minority owns a majority.
For example, 90% of wealth is concentrated in the hands of 10% of people in the world. In the forex market, only 5% of traders earn passive income. And they make at the expense of the remaining 95%.
To enter this peculiar club “5%” we need to find out how these people trade, how they relate to trade, how they behave.
In trading, the phrase “the less – the more” is relevant. At first glance, the phrase is rather stupid, but further reading of the article will put everything into perspective.
Pareto Principle in forex
According to the Pareto 80/20 principle regarding forex, the following can be distinguished:
- only 20% of transactions bring 80% of the profit.
- 20% of analysis and market research contain 80% of the positive effect.
- 20% intraday trading and 80% medium-term trading.
- Only in 20% of cases, you need to be in a deal, in 80%, not so.
- Your success depends on only 20% of the strategy and 80% of psychology and discipline.
Let’s further explain the above-mentioned points.
1. Only 20% of transactions bring 80% of the profit
Experts say that you should choose only the best deals. However, at the initial stage, we all try to conclude a lot of transactions in thirst for a quick profit. So you can look at your trading journal and see how usually 80/20 worked on your deposit.
2. 20% of analysis and market research contain 80% of the positive effect
It often happens that we spend too much time analyzing the market, looking for signals, and looking for trends and patterns. Because of this, subjectivity appears, we begin to look for signals that confirm our assumptions, and not signals that the market tells us. Leave the market all the dirty work and trade only on the system.
3. 20% intraday trading and 80% medium-term trading
Trading on a daily time-frame testifies the success of the trader, his/her confidence in his/her system, and trading style.
I do not know a single billionaire who would have made his fortune on scalping strategies or trading on small time frames.
All successful traders traded or eventually switched to a longer time-frame. But, in order not to get bored, I advise you to open a small additional account to conclude transactions within a day.
4. Only in 20% of cases, you need to be in a deal, in 80% not so
This aspect has already been touched upon in the first paragraph. Still, it is worth adding that learning can help beginners correctly find the very 20% of the most profitable transactions, and bypass the remaining 80%.
5. Your success depends on only 20% of the strategy and 80% of psychology and discipline
The hardest part of trading is keeping your emotions in check. Ask any pro-trader. Also, you have to stick with the trading plan. And that’s how the Pareto Principle is applicable in Forex trading. By following this principle, you can take your trading to the next level.