The 80/20 Principle is a very effective concept in achieving efficiency. Instead of wasting resources on unimportant tasks, you can focus on core revenue making activities. This principle is one of the essential concepts in modern day business. It also holds the same value as Forex trading.
This blog post discusses what the 80/20 Principle means, why it's effective, and how Forex traders can benefit from it. Instead of scanning, I highly recommend reading this entire post. Information overload is rampant in our modern society. We are not used to focusing on any topic for longer than 30 seconds.
The 80/20 Principle is an enormous time saver. If you spend 10 minutes learning these skills now, it will have an endless return in the future. An example of a great reward: (lifetime saving of time) to risk (5-10 min of reading). You can also read, forex trading advice and trade example.
80/20 PRINCIPLE EXPLAINED
The 80/20 Principle is often named differently. Other names include the 80/20 Rule, The Pareto Law, the Pareto Principle, among others. This rule was discovered in 1897 by Vilfredo Pareto, an Italian economist.
The pattern underlying the 80/20 Principle is that the distribution of results is predictably unbalanced. The 80/20 rule states, 20% of the input will create 80% of the results (output).
Put in different words: 20% of the resources will create 80% of the success.
Input/resources could be time, money, effort, skill, etc that a project, person or business puts into achieving goals. Output/success could be anything: profit, revenue, membership count, customer satisfaction, etc.
The main point is that the numbers are highly unbalanced. Humans tend to think that each unit of effort, or resource, has (almost) an equal importance in achieving success. But the 80/20 Principle clearly explains the numbers are highly skewed. The probability theory explains that it is, “virtually impossible […] for the 80/20 Principle to occur randomly.” (Source: the 80/20 Principle by Richard Koch, page 13).
The 80/20 balance is not fixed. 80/20 numbers are also examples. The ratios could be different: 30% of the resources generate 70% of the success. In fact, they don’t have to add up to 100 either. 5% of the profit could derive from 50% of the customers. 75% of the revenue stems from 25% of the products. And 65% of our achievements are based on 20% of our efforts.
Last but not least, what is the importance of the 80/20 Principle? The significance for businesses is stunning. The value of knowing, for instance, that 90% of your revenues and 85% of your products are generated by 22% of your customers is enormous. The owner or manager can then allocate sufficient resources, time, and energy to this group. Deeper analysis, however, is always needed.
For instance, there could be a future customer that has a potential of generating big business. The 80/20 Principle helps with knowing what is happening NOW and what/where a business should investigate. Deeper analysis is required before conclusions are made. Here is an information on gold investments.
For more information, examples, usages, and argumentation of the 80/20 Principle, I highly recommend reading the book, "80/20 Principle," by Richard Koch. In the book, he explains why the 80/20 Rule is valuable and how it can be used for business, our personal lives, and personal efficiency. You can also read, budgeting in forex, to gain better trading skills.
80/20 PRINCIPLE IN TRADING
Forex traders can use the 80/20 Principle as well. In fact, there are many ways Forex traders can apply the analysis from the 80/20 Principle. The 80-20 rule not only holds true for the analysis of our P & L account, but also for a wide range of topics.
Number 1: trading performance. Traders can analyze these relationships:
- Are the majority of losing trades caused by the same mistake?
- Are the majority of losses coming from a few trades?
- Are the majority of losses coming from a small number of days?
- The same questions can be asked for profits and winning trades as well.
Number 2: individual performance (personal effectiveness). Traders can analyze these relationships:
- How much time is spent on each task and how much benefit does it bring?
- What are the crucial tasks in my trading that lead to the most results?
- What actions are the most beneficial for my results?
Number 3: the market. Traders can analyze these relationships:
- 80% of the time the market is in the middle of a move (not reversing), whereas 20% of the time the market is forming a top or bottom.
- 80% of the time the market is not trending, 20% of the time it is trending;
- 80% of the market moves are noise, 20% of the market moves are an actual signal;
- 80% of the time the market is in a consolidation and 20% of the time it is in an impulse.
Number 4: strategy performance. Traders can analyze these relationships:
- Do the majority of the trading opportunities occur at the same points during the strategy?
- Are the majority of my wins generated by a minority of the same entry type?
- Do the majority of my filters have very small impact on the performance?
- Do a minority of my tools and indicators have the most positive impact on the strategy?
It is important to note that the Pareto principle can help traders understand their own performance, and the market’s movement in depth.
The above questions and ideas are examples. Everyone is highly encouraged to analyze and find connections that benefit them as an individual trader. This is not limited to the above, and many more ideas can be created.
In fact, we encourage you to use your thinking cap and evaluate your trading using the 80/20 Principle. Do you notice any cause and effects? What facts did you discover about your own trading when using the 80/20? Let us know down below in the comments section!
The 80/20 Principle is a trader's golden rule. It allows us to focus on the most important and valuable core tasks, methods, and resources. The focus is the only way anybody can enjoy their tasks, be in the ‘flow’ of things, learn and retain information, and direct their attention to specific, valuable goals. Read more in “Focus” by Daniel Goleman. If you are interested in reading more about the, "80/20 Principle," By Richard Koch, to learn more about the 'doing more with less strategy', you can find his book here.
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