Explain the 80/20 principle

The 80/20 Rule has another name, the Pareto principle. This principle was discovered in 1897 by Vilfredo Pareto, an Italian economist.

The 80/20 Rule states that 80% of the results come from 20% of the effort. In other words, 20% of your resources create 80% of success.

Resources here can be time, money, energy, skills, etc. that traders need to spend to achieve their goals. Results or success in trading can be profits, methods, skills, ...

The point is that these numbers are out of balance. We often tend to think that each unit of effort, or resource, is almost equally important in achieving success. But the 80/20 rule makes it clear that those numbers vary widely.

Actually, the number of 80/20 is not completely accurate. This ratio can also shift slightly like 70/30, or 75/25. Or we don't have to be 100% round, but sometimes you can see, for example, 65% of the results come from 20% of our efforts.

When we know where most of our profits come from, or where our losses come from. Traders will know how to distribute resources properly, from time, energy, money, ...

The 80/20 principle in trading

The 80/20 Principle will help traders think and evaluate the following problems in trading.

1. Trading performance

Traders can analyze the following relationships:

  • Are the majority of losing trades due to the same mistake?
  • Most losses come from a few trades?
  • Most losses come from a few days?

Similar questions about profitability in trading you can ask and find the answers yourself.

2. Personal performance

Traders can analyze the following relationships:

  • How much time did you spend on each task and what were the benefits?
  • What are the most important tasks in trading for the most obvious results?
  • What actions were most beneficial to your results?

3. About the market

Traders can analyze the following relationships:

  • 80% of the time the market is in between periods in a price movement. And 20% of the time the market is at a top or bottom.
  • 80% of the time the market does not tend, 20% of the time it is trending.
  • 80% of the market will generate noise, 20% of the market will give actual signals.
  • 80% of the time the market is in accumulation and 20% of the time the market makes waves.

4. Performance strategy
Traders can analyze the following relationships:
  • Do the majority of trading opportunities occur at similar price ranges in strategy?
  • Is the majority of profits generated by the same entry point?
  • Do most strategy filters have a very small impact on trading performance?
  • Does a handful of tools or indicators have a very positive effect on strategy?
The 80/20 Rule will give traders a deeper understanding of their performance, trading methods and the price action of the market.