What is 80/20 or the Pareto principle in Forex?

What is 80 20 pareto principle in forex
What is 80 20 or Pareto principle in forex?

We know the Pareto Principle as 80-90. However, in the forex market, the 80-90 rule is not an absolute number.

We also know the Pareto principle as the 80-20 rule, which deals with scarcity.

The Pareto Principle states that sometimes 80% of the resulting effects stem from 20% of the causative factors.

The name comes from an Italian economist Vilfredo Pareto who conducted a survey in 1906 that 80% of all Italian territory owned by 20% of the Italian population, and 20% of peas are skin, 80% is the contents of the beans.

Talking about Pareto directly reflected the 80/20 rule, which interpreted: from 80% of the results got produced by 20% of the efforts we made.

In a business, suppose you are an entrepreneur who has 10 types of business. Usually, only 20% or two business sectors really provide the biggest profit, while the other 8 businesses only act as supporters of 2 main businesses.

Many also use 80% effort to get 20% results. Although equally beneficial, but in terms of effectiveness most will choose 20% of efforts to get 80% of results.

If we choose 20% of the effort, we must be smarter in planning a business strategy.

In the business world, there are unwritten rules that 80% of sales generated by 20% of total clients or customers, and 80% of complaints received are from 20% of customers.

In mathematics, this 80/20 rule called the Pareto distribution. How does the Pareto principle occur in forex trading, like the Fibonacci theory?

In the forex market, the 80/20 rule is not an absolute number, but an approach ratio.

In reality, it can be 75/25 or 90/10. The ratio figure only shows the portion of cause and effect that occurs in forex trading.

Like for example, 80% of your trading profit results from 20% of all trades you make. But in very rare and extreme circumstances, the ratio could be much greater, for example, 99/01.

You often hear or read that 90% of forex traders suffer losses, and only 10% can generate profits consistently.

Even though the true ratio between a trader who loses and who can consistently profit cannot precisely determined, it is most likely to be between 80/20 and 95/5.

While not all forex traders can be successful in a short time, the phenomena that often occur are:

1. 80% of a trading period is not right for entry, while 20% is suitable for market entry.

If you are already proficient and accustomed to using certain strategies and trading systems that have tested, trading signals that are valid you will rarely get, only about 20% of your trading time period.

2.  80% of the profit you get results from 20% of all trades you make.

3.  Apart from trading results, actually, if you already have a trading method even though it is simple, it is very easy for you to enter the market often. Only open buy or open sell.

But signals with high probability and profitable you will rarely get.

This means it is easy for you to over-trade, the market is always open to it, but the conditions that are profitable are only around 20%.

You can check your trading statement or journal periodically, whether it follows the Pareto principle.

4. For long- and medium-term traders 80% of all trades carried out on high time frames, while 20% on lower time frames.

Daily or short-term traders 80% of all trades carried out at low time frames and only 20% at higher time frames.

5. 80% of your trading success determined by psychological factors and money management, while only 20% determined by trading strategies and systems.

The Pareto principle is also very common in Forex, especially among professional traders. The Pareto principle held by professional traders lies in limiting the risk of 20% of the total capital held.

For example, capital owned is 100 million, professional traders will only limit the drawdown or loss limit of 20 million capital to get optimal results within a certain period.

The application of Pareto's law has proven to reduce the psychological pressure experienced by traders. Put, the trader naturally knows of assuming: "to trade on Forex, only need to use 20% of funds to get the maximum profit opportunity within a certain time period".

So, for those of you who still think trading is bankrupt, please reflect again, what are your goals in forex? Greetings Profit!

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