This trading tip is related to another one we have written on and consider vital to long term trading success which is patience. If you learn the 80 – 20 rule, you will see how to make bigger profits while at the same time, you will be spending less time on your trading strategy.
The 80 – 20 rule is a rule which is used in many areas of life and is frequently taught in business schools so what is it? Let's look at the rule in more detail and after reading and understanding it you will see why, I consider this one of the most valuable currency trading tips for bigger profits.
The Pareto Principle 80 20 Rule Explained
The 80 20 rule is also known as the Pareto principle after the Italian economist Wilfred Pareto. At the turn of the century in 1906, he noted that 80% of the land in Italy, was owned by just 20% of the population. He then postulated that, in many areas of life 80% of the effects come from 20% of the causes. He gave several examples of this an another was - of the pea pods he grew, 80% of the peas were in just 20% of the pods.
Many economists have looked at the 80 - 20 rule and applied it in various areas of life and one of the most popular is in the business world. In Business, its commonly accepted, that “80% of sales come from just 20% of clients".
Mathematically, the number 80% is not set in stone and you will have variance of this number but in many areas of life, this number will show intermediate imbalance in distribution.
The 80 – 20 Rule Applied to Forex Trading
So what use does the rule have for Forex traders?
In terms of business, its taught to get clients to focus on the small minority of customers who give them the majority of profits and in trading currencies it focuses us on the fact that the trading frequently is not a good way to make money.
Traders should be looking to filter trade set ups and focusing on the 20% of trades which really matter. In other words – focus on the trade set ups in your trading strategy which have the best potential to make the biggest amount of profits and have the best risk to reward.
Most traders who are new to trading Forex markets want to trade they see numerous chart set ups and are keen to transact a lot of trading signals but they end up taking to many trades and lose money.
Forex brokers encourage traders to trade to much and lose. They make money from clients who trade frequently and lose equity and there is also a huge scam industry in robots and Forex Expert Advisors which tells traders they should be trading all the time and if they do they will make a regular income.
The end result of course is traders are transacting trading signals which have low odds of success most of the time and losing. The smart trader knows to win he has to have a currency trading strategy which focuses on the best chart set ups and therefore he makes less trades but ends up making bigger profits.
If you apply the rule in your trading plan, you will increase your profits from your trading system, spend less time running your trading business, be less stressed, more confident and be trading like a professional trader – its a simple rule which is easy to understand and apply and it works.
If you are learning how to trade Forex then you should learn the 80- 20 rule because it will help you make bigger profits but you can also apply it in other areas of life as well.
In your life there are activities which you do which are your 20% that account for the majority of your income and overall happiness – your 80% By focusing on your 20%, you will be able to get more from life.
So the 80 – 20 rule is one which most Forex traders don't know or don't learn but if you do, it will help you become a successful forex trader and its a trading tip which I think is vital to understand in terms of both trading currencies and organising my business and personal time – in fact it is a principle, I apply in all areas of my life.