The 80/20 rule In Trading. How To Implement It?

The 80/20 rule In Trading. How To Implement It?

The 80/20 rule is a mathematical principle that applies to every field.

It suggests 80% of outcomes result in 20% of the effort.

For example, a company can generate 80% of profits from 20% of customers.

Now don’t get me wrong, but I didn’t make the principle.

A guy named Pareto did.

And you can apply the rule in trading as well.

Saqib Iqbal 282 Updated:

Content

I want to give you a detailed take on principle.

I want to tell you how you can apply it in trading.

So, buckle up as I start the wild 80/20 ride.

The 80/20 rule In Trading

How do we get the 80/20 rule?

How do we get the 80/20 rule?

Before I go any further, I want to tell you an interesting story.

I want to narrate how we got the 80/20 rule.

Let’s find out.

Vilfredo Pareto developed the 80-20 rule in Italy in 1906.

Pareto, an economist, discovered that 20% of the pea pods yielded 80% of the peas.

He then calculated that 20% of Italy’s people owned 80% of the land.

According to Pareto’s observations, 20% of the people held 80% of the land in Italy.

After examining several other nations, he discovered that the same was true elsewhere.

Pareto principle

Pareto principle

The Pareto principle is that items in life are not always equal.

The 80-20 rule’s use has grown beyond Pareto’s garden’s humble origins.

The 80-20 rule states that 20% of your efforts make 80% of the account’s growth in trading.

Further reading

What's the 80/20 rule in trading?

What's the 80/20 rule in trading?

There are some key stats to add for the 80/20 rule.

I am going to explain these stats now, along with an explanation.

So, you have to remember these points.

  • Only 20% of trades generate 80% of the profit.
  • 80% of your winning trades depends on 20% of market analysis
  • 80% of long-term trading and 20% of short-term trading.
  • You need to be in a trade 20%, in 80% not so.
  • Your success depends on 20% of your approach and 80% psychology

Let’s further explain the points mentioned above.

1. Only 20% of trades generate 80% of the profit

According to experts, you should only select the best trades.

However, in the beginning, we all strive to close a large number of trades to make a rapid profit.

So you may check your trade log to see how 80/20 generally works.

You have to go in strong and make a nice chunk of change on the trade.

If it goes in your favor, you make some cool pips.

You have to trade with patience and precision.

Applying the 80/20 rule in trading

Applying the 80/20 rule in trading

The winning trades will come with proper risk management.

In the end, you have to have more losers than winners.

2. 80% of your winning trades depends on 20% of market analysis

We frequently spend too much time examining the market.

We search for indicators, trends, and patterns.

As a result, subjectivity emerges.

We start looking for signs that validate our assumptions.

And not look see what the market is telling us.

The trading strategy you use doesn’t require a complex algo.

You don’t feel like winning if you use every method you can.

Leave the market all the work and don’t overtrade.

Pro traders tend to spend less of their time and focus on other aspects of trading.

They spend about 20% and use 80% of their market research.

3. 80% of long-term trading and 20% of short-term trading

Trading on a daily timeline demonstrates the trader’s success.

It increases his/her trust in the trading system and trading style.

I don’t know a single billionaire who made his money through scalping.

All successful traders traded or shifted to a longer timeframe at some point.

But I advise you to open a small account for day trading.

Trading on a daily timeline demonstrates the trader's success

It can help you foresee the market momentum during the day.

I would like to point out that traders lose money when trading on smaller time frames.

It fits well with the 80/20 rule.

It’s because 20% of traders focus on larger timeframes.

And they are the ones that make the real dough.

4. You need to be in a trade 20%, in 80% not so

You don’t need to overtrade.

It’s the essence of pro trading.

Many pro traders may take positions only 4 or 5 times.

I don’t trade too often and don’t open trades at every move.

I’m choosy in my trading style.

I don’t like to risk more than 1% on my trades.

80% of profits come from 20%

80% of profits come from 20%

Many traders try their hand in algorithmic trading or high-frequency trading.

These styles allow you to open multiple positions during the day.

Now, I’m not saying these trading styles are wrong.

But as a beginner, you can’t rely on these methods.

They are exclusively for pro traders.

And when beginners try them, they lose money.

It’s worth noting that learning can help you in the process.

If you want to earn more, you gotta learn more.

It can help you have 20% of profitable trades.

5. Your success depends on 20% of your approach and 80% psychology

Ask any professional trader what the most difficult aspect of trading is: controlling your emotions.

There’s no holy grail in trading.

What you can do is control your emotions.

Focus on risk management and your trading psychology.

Yeah, strategy is important, but psychology is more important.

If you read any trading book, the author first mentions trading psychology.

So, just control yourself and focus on the process.

Further reading

Pro tips for the 80/20 rule

Pro tips for the 80/20 rule

Now that you know all about the 80/20 rule in trading, it’s time to give some pro tips.

If you want to go with the 80/20 rule, you need to remember these tips.

Let’s dig deeper into this.

When applying the 80/20 rule, you have to remember market nature.

The market moves in cycles.

It doesn’t go according to you and me.

And when you adopt this reality, you make good returns.

When you adopt this reality, you make good returns

Also, when things are going your way, don’t pull some tricks.

Don’t force yourself to trade each day or hour.

Back off from trading when you don’t feel like it.

I know it’s hard to only trade 20% of the time when things are going your way.

But trust me, big gains come when you don’t trade too often.

In the end, it’s all about having more winners.

If you trade too often, there’s a chance you don’t have more winners than losers.

There are going to be long periods when you are simply treading water.

The key is to not let impatience and frustration during those periods drive you.

And in the process, you take too much risk or make other poor decisions.

Many traders use take-profit, but they generally don’t consider the 80-20 rule.

The great value of profit targets is that they are motivational.

However, your ability to meet them varies greatly as the market goes through its cycles.

It is important to keep pressing when you have a strong run of gains.

And to take advantage of whatever the conditions might be that are helping.

Still, don’t forget that it won’t last forever.

Cycles and the 80-20 rule will come into play again.

If you are not making progress, then don’t trade at all.

Go fishing, do something that makes you happy.

Come back when you are ready for the market cycles.

Don’t drive yourself crazy trying to find the holy grail of trading.

Sooner or later, things will shift.

In the market, equal effort doesn’t yield equal returns.

You can work just as hard at some points and struggle at other times.

Simply acknowledging and embracing that idea not only relieves some stress.

But can help you optimize profits when the time is right.

Learn more interesting facts about forex.

Further reading
FAQs

FAQs

  1. How did we come to know about the 80/20 rule?

Vilfredo Pareto, an Italian economist, developed the 80/20 rule while studying the land distribution of the country. Later, the 80/20 rule fitted in every business and financial trading.

  1. How to apply the 80/20 rule?

Applying the 80/20 rule isn’t complex. It’s not like you have to put any mathematical formula on the chart. You just have to remember the key stats when applying the 80/20 rule.

  1. Can I apply the 80/20 rule in any market?

Yes. The good thing about the 80/20 rule is you can apply it in any market, whether forex, stock, options or even crypto market. You can trade with the rule without a hiccup.

  1. Does the 80/20 rule work?

The success of the 80/20 rule depends on the trader. You have to stay patient, control your emotions, and apply proper risk management if you want the 80/20 rule to work.

  1. Is the 80/20 rule suitable for any strategy?

Yes, 80/20 applies to every strategy. However, as I mentioned earlier, the rule becomes more effective when you trade on larger time frames. According to the rule, 80% of long-term trading results in a significant sum.

Final thoughts

The 80/20 rule is a good addition to your trading strategy.

It’s easy to understand, and anyone can apply it.

If you want the rule to do all the talking, you need to remember the pro tips I mentioned earlier.

Further reading