There are many question being asked daily by a lot of traders around the world, most of these questions are focusing on the best ways to get profits and to avoid or reduce the loss. This can be achieved by a good money management and risk management technique. A lot of techniques have been studied and published everyday.

Pareto law is the one of the best techniques which is applied in the trading system. For many events, roughly 80% of the effects come from 20% of the causes? This law is also known as the 80-20 rule, the Pareto principle. It is the law of the vital few and the principle of factor sparsity. The 80/20 Rule was discovered in 1896 by the Italian economist Vilfredo Pareto, which is why the Rule is also called the Pareto Law, the Pareto Principle, and the 80/20 Principle. Pareto discovered the odd balance when he examined that 20% of his peapods contained 80% of the peas.

This article discusses how you can apply the simple logic of 80-20, which indicates that 20% of the input and effort will create 80% of the output or success.

Are the numbers always 80/20?

No, the 80/20 numbers are just an example used to illustrate this odd relationship between small and large. In reality the numbers can vary from case to case but the main characteristic is that they are unbalanced and far off from 50/50.

For instance, an ice cream shop might get 60% of its profits from 15% of its regular customers. This is also a valid example of the 80/20 Rule at work.

Traders and people in general tend to believe that each unit of effort or resource has (almost) an equal relevance for success. However, the 80/20 Principle bursts this bubble and shows that the numbers are highly skewed.

What are Pareto law measures?

The success or output can also be various: profit, revenue, mistakes, membership, customers, and ratings in general and for trading.

Here are a few more practical examples:

• 20% of the peapods contain 80% of the peas (discovered by Pareto himself)
• 33% of your hobbies will demand 90% of your time
• 10% of tasks at work lead to 70% of your career achievement
• 25% of your mistakes when trading lead to 75% of your losses
• 20% of our the books can deliver 90% of new wisdom 

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. We 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, we 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. Also, you have to stick with the trading plan. And that’s how the Pareto Principle is applicable in Forex trading.

Conclusion

The implication here is clearly that you can eliminate about 80% of your trading losses by avoiding emotional or impulsive trading. The first step to trading with an ‘80/20 mindset’ is to master a simple trading strategy. You can choose any strategy from the list of trading strategies available. Just you need to focus more of your time on the real “money makers” in trading, which are money management and your own mental state. Thus, the 80/20 rule in trading is best applied by combining a simple trading strategy and a strong focus on money management and psychology. By following this principle, you can take your trading to the next level.