Top Binary Options Broker 2020!
Best For Beginners!
Free Trading Education!
Free Demo Account!
Get Your Sign-Up Bonus Now:
Only For Experienced Traders.
The 80/20 Rule in Trading. How to implement it correctly
There is a selection of rules and approaches in any field that can help you be more effective and get better results. Trading on the financial market is no exception. In this case, every investor adopts an entire series of specialized approaches and rules for generating better results, such as strategies, plans, and money management guidelines just to name a few. That being said, other than specialized rules, there are more universally-applicable approaches that can create the ideal conditions for trading financial assets. This article will examine the 80/20 rule, also known as the Pareto principle, and how it can be applied in a trading context.
The empirical 80/20 rule was developed by the undoubtedly brilliant economist, engineer, and sociologist V. Pareto, who in 1906 noticed that this division is present in nearly every economic sphere. For example, 20% of the Italian population owns 80% of all the land and workers can only work effectively 20% of the time, the remainder of the time they are less productive! When analyzing how this rule plays out in daily life, it is worth noting that the ratios can vary greatly from the clear norms. It is not uncommon to see significant divergences, such as 75/25 and 99/1, however, overall the system is applicable and regulates every sphere of human activity. If you were to consider this principle in a wider context, it is worth noting that the basic concept is present in every sphere of life, from health and wellness to economics and finance. The universality of the rule and the ability to utilize it as a tool for improvement has made this approach very popular in various fields of economic, marketing and financial research. We propose examining how the 80/20 rule can be applied to trading.
How do you apply it to trading correctly?
So, financial trading is first and foremost statistics and numbers that are used by traders to generate forecasts and develop strategies. Therefore, it is unsurprising that the statistical 80/20 rule has been widely adopted in this field. It is likely that many traders noticed that they don’t always trade as effectively. A simple example of this is that 20% of trading contracts produce 80% of a trader’s profit. And, of course, many know that only 10-20% of those trading on the market achieve success, the rest lose their capital. Of course, this is the most basic example that demonstrates how effective this rule can be. Speaking more specifically in terms of concrete examples of this principle in action in the sphere of financial trading, it is worth highlighting the following statistical inferences:
в—Џ Market conditions are only good for effective trading 20% of the time, the remaining 80% of the time the market is unsuitable for trading
в—Џ Effective traders are only on the market 20% of the time, the rest of the time they devote to other matters
в—Џ Only 20% of contracts lead to 80% of profit
в—Џ Statistically, 80% of trades placed are simple, the remaining 20% are complex
в—Џ 80% of trading takes place during the day, and 20% in other timeframes
в—Џ 80% of a trader’s success is down to psychological factors, and analysis and strategy only make up 20%
в—Џ 20% of readily-available forecasting tools are effective at market analysis, the remaining 80% of tools don’t give you any useful information
в—ЏThe quality of a technical forecast is 80% down to the analysis of macroeconomic statistics and news and only 20% reliant on technical market data
As you can see, this principle can be widely applied on the financial markets. Let’s breakdown of the main assertions and run through how they can help improve trading signals.
Top Binary Options Broker 2020!
Best For Beginners!
Free Trading Education!
Free Demo Account!
Get Your Sign-Up Bonus Now:
Only For Experienced Traders.
Trade 20% of the time, relax the other 80%!
The primary trading issue in terms of profit hinges on stability generating accurate trading forecasts. The problem is that the market is chaotic and only forms a clear pattern of rate movement that can be forecasted through specialized tools and approaches 20% of the time. More than likely, all active traders have noticed through observing chart liquidity throughout the day that they can only form relatively few effective trading positions. Other than that, no trading system generates signals stability anytime during the day. All of this is caused by a myriad of factors, the leading of which are macroeconomic drivers and the statistical of traders’ activity, such as total capital, the number of market participants, and interest in any given asset. Of this forms the necessary conditions for applying the basic 80/20 rule.
To put it simply, the market conditions are only ideal for trading 80% of the time. This brings to mind a statistic of successful traders that only 80-90% of investors can achieve success on the market, the rest just lose money.
Many online traders on the financial market try to trade actively despite the 80/20 rule and time management, meaning that the quality of their forecasts and general trading signals decreases significantly. As follows, a large number of contracts placed based on questionable forecasts lead to capital loss, not gain. Consequently, this can be resolved entirely logically using one basic rule, trading is a field where “if you do less, but to a higher standard, you will profit more financially”!
When deciding on an effective time management regime that meets your needs, you should never forget about the 80/20 rule. This will not only help you set up the best trading conditions for you but also increase how effective your trading operations are. Other than that, this trading regime allows you to spend minimal time and achieve better trading signals.
20% of contracts produce 80% profit
In this sense, the rule works flawlessly! Despite the quality or performance of the strategy, for the vast majority of traders, only 20% of their contracts lead to an increase in capital. The reason for this is not only down to technical trading signals, but purely statistics as well. As we already mentioned before, the market is only ideal for trading 20% of the time, meaning that contracts opened at the right times perform best financially. On this basis, first and foremost, without taking into account the level of predictability of the market when a seemingly accurate trading signal has been received, the risk factors of a contract is increased, meaning the level of possible profit.
By using the basic 80/20 rule when determining your financial plans, you will not only correctly and effectively manage your own funds, but also create the possibility of improving your trading results. To put it simply, it isn’t worth pursuing trading positions for little profit, trade patiently under the right conditions and your signals will increase without a doubt!
Simple positions VS complex
This is perhaps the simplest part of the article. It is all logical here, trading on a basic concept is a very simple process! Judge for yourself, what could be easier than following the chart at a certain time, receiving a forecast from your strategy, and placing trades? We are the ones that make it more complicated for ourselves. For example, if a young child, who didn’t know a thing about complex market patterns or how hi-tech indicators worked, was drawn to analyzing the market, they would generate a large number of accurate signals than you! What you should take from this is that you shouldn’t overcomplicate trading, use the simplest approaches for analyzing the market. Therefore, you will achieve the right contrast ratio and you can dynamically increase your profit growth.
However, when considering this question it is worth mentioning that it is also a bad trading approach to completely ignore complex trading positions. By working with complex analysis systems and strategies you can trade more effectively with long-term contracts. That being said, don’t forget about the 80/20 rule and form the right ratio of total trading positions.
Day trade 80% of the time and 20% in other timeframes
Typically, online traders prefer to trade over minimal chart rate periods. It is completely clear why as this leads to more dynamic trading within a 24 hour period. At first glance, such a trading regime appears to be more interesting and lucrative. However, when keeping in mind the 80/20 rule we know that quantity does not equal quality, the opposite is true. And this is why! By analyzing timeframes shorter than daily, traders significantly decrease their scope for analyzing the market, therefore decreasing the quality of forecasts. The reason for this is technical. The issue is that the shorter chart liquidity timeframes, the higher the level of market noise, significantly influencing the effectiveness of any strategy. Moreover, shorter timeframes demonstrate more chaotic fluctuations which are difficult to analyze. As a result, they can lead to losses. In contrast, day charts enable you to see a wider picture of the market, which undoubtedly increases how effectively you trade. This leads to an increase in the market trends forecasted, better pattern identification, and more accurate trading signals. On the basis of this, you could say that the 80/20 rule applied in such a way is an indispensable tool for improving how effectively you trade. For practice, we recommend that you adopt the following approach to trading operations: 80% of the time work on a daily asset liquidity chart, and 20% of the time work on hour or minute timeframes. However, when you are generating forecasts on shorter timeframes, take into account the overall signals from the daily charts. With such a regime you can improve the results of your trading operations by 30% on average!
Achieving success 80% of the time is psychology!В
Many an article has been written on the connection between the psychological state of an online trader and their likelihood of achieving success. However, the 80/20 rule aptly expands on this question. What do we mean by that? Every experienced trader knows what haunts traders, the fear of losing capital, anxiety, and the drive to make more and do it now! On that front, this leads to a loss of discipline and, as follow, financial loss and disappointment! Therefore, when you enter the market, 80% of your attention should be on controlling your emotions and limiting the negative psychological aspects of trading. This will improve your statistical signals. Relax completely, display a high level of discipline. and form contracts with cold and clear calculations. If you do this, you will definitely achieve success. Yes, of course, 20% of your remaining attention should be focused on the quality of your technical analysis of asset liquidity charts.
So as to ensure that you apply the 80/20 rule effectively when trading on the financial market, you can conduct your own simple experiment, examine your own trading statistics over various periods. Without a doubt, you will notice a basic pattern: 80% of your contracts will be losing, 20% will produce peak profit. This will be true of every indicator as well, from the risk level to the choice of optimum time to trade and the cost-benefit of market analysis. Don’t waste your time fighting nature and mathematics, learn to harness it!
So, the 80/20 rule, as you can see, is very effective for trading on the financial market. If you closely follow this approach for increasing how effectively you trade, then you can definitely improve your trading results by the end of this year.
In conclusion, it is worth mentioning that the full potential of the 80/20 rule as it applies to financial trading has yet to be uncovered! That being said, we can speak to the popularity of it and the great potential it has for other applications in the future!
вЂњGeneral Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.вЂќ
Learn how to set trading targets correctly. Why do you need them and why are they important?
You need a certain level of motivation and skill in any field to succeed and trading is no exception. Today we will be looking at how trading targets, both psychologically and practically, help you achieve material success. When going through this, we will touch on how to best set targets, how to meet them effectively and what examples enable you to become a financially successful investor.
So, we’ll begin by pointing out how trading is one of the most lucrative approaches to earning profit. Yes, you do little physically, but that is compensated for by mental effort and the psychological aspects of trading. These factors set trading apart a field of its own. However, for beginners just entering the market with dreams of achieving astounding material results, but lacking the knowledge to set concrete targets correctly and identify starting points for their work. The majority of your strength and resources are spent on this front, and the achievement of your concrete target only gets further and further out of reach. The vast majority of new traders prone to positive thinking, which too often leads to actively pursuing targets. As an easy example, everyone wants to be a professional trader earning a sizable income as stable as possible, but at the same time, we don’t want to expand the most valuable resources, time and money, to achieve these goals. Once you understand that, you’ll know that the right attitude is just as important as the moves you make as an investor on the market. And, of course, the fundamental approach to trading on the market should be to set specific end targets and identify starting points for working on the market.
Why do 90% of traders burn out?
It’s not any secret that only a few achieve these high trading results, and the vast majority lose all their funds and crawl out of the market. The reason for this can be found in psychology, specifically, in the role positive thinking plays. This form of social behavior can literally be observed everywhere around you. So, every positive person strives to have the most status symbols, everything ranging from having a more luxurious house or car down to having a general feeling of happiness and wellbeing. However, at the same time, these goals are viewed as a dream more than anything else and they take no real step to achieve them. To put it simply, the vast majority of society just sits on their couch daydreaming of yachts and wealth, not to lifting a finger to try to achieve it.
Apply this to trading, you could say that 90% of investors on the financial market act with this psychological mentality. To resolve the situation, you need to learn how to set targets correctly and develop a pattern of psychological behavior for the market. These will become your most important starting points for achieving success. Base your behavior professionally on the market on taking the right tone in all the technical moves you make and abstractly and objectively evaluating surrounding events. Of course, these lofty matters are difficult for a layman to fully digest, so we will give a practical example.
All traders active on the market give various different tools for technical analysis leading roles. In applying these strategies, approaches, and practices, we can more effectively set lucrative market levels where we can close profitable contracts. However, when only evaluating technical indicators, we miss the psychological inner-workings of the market. Here, the algorithms of large-scale investors come into play, as the sheer volume of their investments can influence the market. At first glance, the overall strategy and clearly defined plans of large-scale investors can seem the most lucrative, but in the end, it is a losing contact and all funds are lost. What happened? Once you’ve gone through an objective evaluation of the external factors, you’ll see that GURUs can make mistakes and set the wrong overall tone for the market as well! If you follow the crowd, abandoning all attempts at setting your own aims and goals, you’ll never achieve meaningful results. Therefore, in order to become a professional trader, you must learn how to work in a team, get access to technical analysis tools of the highest quality, correctly assess external factors and always follow your own chosen path. This is the only way you won’t fall into the 90% of traders, who lose their funds continuously.
Moving away from the psychological aspects and bringing this topic to a close, we can give one last example. Say you’ve built a beautiful boat from the best materials, using the latest technology, but try to make it go against the tide, in the end, even though you have an amazing boat (in trading, a tool for analysis), it will go in the wrong direction. So, either you stay still or sooner or later your ship will collapse under the weight of a wave. Apply this to trading and you could say that even if you are using an amazing strategy if you start off in the wrong direction, you won’t be successful. A concrete target and direction are more important in trading than the analysis tool you use.
What do you need to know when setting your targets?
These days technology for analysis has become so developed that it occasionally gets in the way psychologically of users. By this, we mean that we are bombarded with choice, in terms of information. Everyone is likely familiar with the feeling of when you are standing at the base of a massive bookcase, trying to choose which book to read. In most cases, people chose people either choose something completely uninspiring or decide to read nothing at all. This practical example illustrates the current situation for beginners, in terms of their trade education and learning the psychological aspects of working on the financial market, very well.
The internet today provides a vast amount of material on how to set targets on the financial market, therefore, in order to avoid falling prey to mental traps and running in circles, it is vital to adequately assess the quality and practical value of the educational material. The first thing you should pay attention to as a potential successful trader is the first stage of working out and setting trading targets. These aspects can be seen as a complete list of recommendations on how to correctly set targets:
● Set for yourself a concrete target, regardless of how difficult this may be, you need to keep a positive attitude. In no case whatsoever should you consider the possibility of failing to reach your targets, phrases such as “it won’t work out” and “I can’t” are completely off limits for traders who strive to succeed. The process of achieving targets and the difficulties that investors face along the way are secondary aspects that will be resolved with the strategy of “one problem at a time”. However, the target itself should be set only when you are in a good mood, to speed up the process as much as possible and give your start a boost. The most savvy among us feel empowered when they achieve difficult targets. Without a doubt, set a target!
● The set target should be crystal clear! As you progress toward your goal, you will be faced with many different factors that may influence you to change your target or its specifically-selected indicators. Therefore, the more refined and concrete your target is, the easier it will be to reach it. You’re required to set out your priorities clearly in terms of the specific result you desire to achieve through your actions, identify a path to reach it and based on this outline a plan that you must strictly adhere to. Therefore, you will identify your trading moves in advance, free from outside influence. To put it simply, by mapping out your moves correctly, you protect yourself from mistakes and the corresponding financial and psychological losses.
● Rid your vocabulary of “without” and “no”. In this case, this issue is not only related to human psychology but biology. There is the conscious mind, where we are fully in control of the decision-making process in our daily lives, and then there is the subconscious, which is out with the control of the individual. The conscious mind clearly understands that these words can have several contradictory meanings, therefore, changes the plan of action in every concrete situation they are used. The subconscious, on the contrary, perceives everything in the most literal sense, “no” in this case is taken as a prohibition. Therefore, in order make your targets reality, don’t use these words when describing your end result.
So you can get a better understanding, will give another practical example. The vast majority of webinars, books on trading and forums for analysis present beginners with one aim to start, and that is to gain the skills so as to “not hemorrhage money”. It is a completely logical goal, but it is important to pay attention to the wording “NOT hemorrhage”. In this format, the subconscious takes it literally and in reality, everything goes to the contrary. Your conscious mind will constantly be in conflict with your subconscious, making it impossible to achieve your desired results. Therefore, having the right attitude when setting targets for the formation of end result indicators is a very important aspect of trading.
How do you set targets correctly?
Now we have come to our main topic on all the aspects and practical approaches for setting trading targets correctly so as to achieve financial success. These recommendations will outline as clear as possible the process of setting targets and the path to realizing them. So, in order to trade correctly on the market, get stable results and quickly earn returns, you should set targets in this format:
● Identify the opportunities and put together a realistic goal. However, don’t set the bar too low or, from a psychological and growth perspective, you will quickly lose interest and become bored, and you will switch to relying on optimism. Don’t set unrealistic targets, so as to not set the groundwork for inevitable disappointment and depression
● Clearly set your targets with a positive outlook, using specific formulas
● Outline the intermediate steps to reaching your target. By dividing your target out into small steps, you will lessen the burden of the practical work when achieving the required indicators. Besides that, at every step, you can more effectively evaluate complex points and mistakes along the path of reaching your target, allowing you to correct the pattern of your own behavior, psychologically or otherwise.
● Outline the timeframe for reaching your target. This helps you retain the tone of the work and prevents your conscious mind from falling into hopeful thinking and inaction.
● Select a range of technical means and tools for reaching your financial target. There are professional methods to market analysis and effective approaches to forecasting the rate movement of financial assets.
● Make a list of rules to guide your behavior and follow them strictly on the way to reaching your target.
● Visualize when setting targets. When you imagine concrete goods or material values, not just a number on your screen, you stimulate your subconscious to the right mentality to achieve your target.
Using this set of rules and recommendations, you can correctly set targets on the financial market and gain the opportunity to use the available technical resources for profit effectively.
Put aside the complex psychological points and follow simple, logical steps when trading on the financial market. It is plainly obvious that, for investors, the most important aspect in trading is to set targets correctly. Only with a clear understanding of the end result, with a plan to reach it using specific tools and having the right mentality will can a trader achieve the financial success they dream of.
“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”
1. The Importance of Using a Forex Trading Log
- How to take advantage of a trading log.
- Why it is important to use a trading log and how it apply it correctly.
- Which elements a trading log should entail and how this at a later point in time can be analyzed and improve your trading.
Many sources and advisors recommend professional use and maintenance of a forex trading log, claiming that it will greatly enhance your ability to trade the forex market successfully. However, I have yet to see anyone actually provide clear-cut reasons for these benefits, and how to successfully implement it. In this section I intend to address this problem.
To begin with, let us look at the mechanics of maintaining a useful trading Log. The main concept is that you need to meticulously record the details of each trade that you enter. Many traders prefer using computer programs such Microsoft Word or Microsoft Excel whilst others choose to type-record their entries or simply use pencil and paper.
- Currency pair
- Entry price
- Number of lots opened
- Initial Protective Stop level
- Reason for entering into the trade
- Target price (if any)
- Exit price
- Reason for exiting out of the trade
- Result (pips, $ and percentage)
A more detailed description of some of these items is provided later in this chapter.
After a suitable sized number of journal entries have been recorded, you then have the opportunity to analyze the data to detect certain trends. You could do this by asking questions such as:
- After entry, did the market proceed as anticipated?
- What was my largest reversal?
- If a loss was recorded, was there a prior opportunity to take profit?
- Did I succumb to moving my stop during the trade?
- Did I trade in the same direction as the daily trend?
- Did I let profits run and maximize my gain?
- Could I have improved my entry and exit conditions?
- Did any serious fundamental data releases affect my trade?
- Could I have managed the trade better?
- Did I overtrade?
Are there any real benefits that can be achieved by maintaining a trading log you may ask? Yes, there are! In fact, I would go as far to say that without creating one, your chances of trading the forex market successfully are greatly reduced.
The first important benefit of carefully maintaining a log is that it will assist you in understanding the impact of The Pareto Principle or the 80/20 rule on your forex trading. This rule implies that in many human activities only 20% of the actions involved are vital whilst the remaining 80% are trivial. Such examples are: 20% of your stock takes up 80% of your warehouse, 20% of your sales staff generate 80% of your sales whilst only 20% of your workforce generates 80% of your production.
In a similar way and by applying Pareto’s rule, you should now grasp the concept that 80% of your profit comes from your actions associated with only 20% of your trades. This is great to know but how do you determine which of the 20% of your trades are the vital ones? This is where recording a trading log comes into its own. By recording all the information in your journal carefully, you have the opportunity of later studying your actions in detail.
From your analysis, you should be able to classify which of your trades are profitable and which are not. In addition, you may well be able to locate key trends or patterns such as ‘were you closing trades on Tuesday with profit’ or ‘were all the trades you closed on Monday losses?’ In order to identify the vital 20%, you must develop a strong understanding of the statistics of your actions and their consequent results. For instance, do you enter trades every time a vital item of fundamental data is released? If so, is this strategy profitable in the long term, or is it just a waste of your time and money?
You must use Pareto’s rule to stop deluding yourself that your trading system is probably successful. You need to analyze the key components to prove this fact and then make it more efficient by identifying the key 20% of your actions. Even if you already are trading profitable, there is no reason not to identify the best and worst trades, and decrease the amount of less profitable trades and increase the more profitable ones. The more trades you take, the more you expose yourself to increased risk.
The questions stated above, which you should be able to answer in the process of developing your trading log, is only a small piece of what such study should enable you to answer. There are many other questions which you can ask, to help yourself becoming a better trader:
Are all your losing trades been in the direction of the trend? Which session did you trade? What was your emotional state at the time the trade was entered – tired, drunk, sad, happy, etc.? Were you experiencing a streak of losing or winning trades prior to entering a new trade?
Think of everything which can affect the way you trade, and put it down on paper. Afterward, analyze these aspects and determine which ones you think are the most important. This is necessary, as too many details might result in the opposite of what we want; too much information is no information.
Your trading log will help you by providing the basis from which you can undertake this study. I am not only talking about only removing loosing trades, but also trades with a bad risk to reward ratio for instance. The 80-20 rule turned out to be rather accurate regarding my own trading systems. Changing this was one aspect which made me improve my results and also reduce the time I spend on trading.
There is another extremely important reason why you should log all your trades. You need this information to calculate whether your forex trading system is actually making you profits. This task is normally done by calculating the expectancy value (EV) of your forex trading system.
Once done, the EV will then tell you the average amount you can expect to profit over the long haul, for every $1 risked. Negative EV’s produce long term losses whilst positive ones generate long term profits. How do you calculate the EV of your trading system? This is done using the following formula:
EV= (%Win X Avg_Win) – (%Loss X Avg_Loss)
% Win = percentage of trades that are winners
% Loss = percentage of trades that are losers
Avg_Win = average size of a win
Avg_Loss = average size of a loss
The EV of a trading system is a statistical measure that becomes more accurate as the number of trades included in the calculation increases. This value should be calculated from a statistical batch of about 100 trades to be accurate although a pattern typically begins to emerge after about 30 recorded trades.
EV is a measure of what you can expect to profit for every $1 risked over the long run. This “over the long run” part is important because it means that you cannot have any meaningful evaluation of a trading system with just a small batch of trades. Instead, enough trades must be included in the calculation so that irregular effects are averaged out.
Another important benefit which will be obtained from using a trade log is that it often helps to minimize overtrading. From my own experience and information I got from fellow traders, overtrading can be a difficult task to control. The simple reason why a trade log will reduce this aspect is because it takes time to write down all the details. If you follow your own rules about the log, you will need to consider several different dimensions of the trade before you enter it, and hence it’s not possible to take trades based on intuition. Furthermore, when you have to write down all the details, you will often realize that the trade you are planning to take cannot be justified by any solid arguments, and obviously, the trade should be reconsidered.
You should now begin to understand the merits of maintaining a trading log. Some of the entries that you should consider recording are listed above. Think of other things which you believe might have an impact on your trading, and add those as well.
The first time you start a forex trading log, it might be difficult to realize what is important and what is insignificant. This is a trial and error process, which will take time. Add different information to your log so you can analyze if your trading improves or not. In case nothing happens, you might want to reconsider the specific information entailed in your log and change to items with other aspects. Besides from what you might think of as important, the following dimensions should always have its place in your log:
- 1. Date and time of each trade entered. When you wish to examine the details of a particular trade or to do analysis of a batch of trades, this information will allow you to locate and access the charts for that trade more easily.
- 2. Emotional condition. Oddly enough, this may well be the most important item to record. Many traders have discovered that, if they log their psychological state of mind at the time of each new trade entry, then this action helps them to identify good and bad trading patterns in their behavior at a later date.
- 3. The exact entry criteria that the market price is required to satisfy for each trade. Ideally, this should compare exactly to the one used in your trading strategy and, as such, should provide you with a reminder not to enter a trade unless you have a perfect match. You will also have records after a period of time that will allow you to analyze whether, for example, a losing trade could have been avoided.
- 4. The entry and exit prices and size lot of each trade entered. This information can be used to determine if you overtraded or if you adhered to your money management strategy. In addition, you will be able to calculate the win:loss ratio of your trading strategy.
As mentioned above, add your own elements, and get started now. Find a free example log online, or else create your own excel sheet and start tracking all the details necessary in order to analyze it continuously.
Top Binary Options Broker 2020!
Best For Beginners!
Free Trading Education!
Free Demo Account!
Get Your Sign-Up Bonus Now:
Only For Experienced Traders.