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the 8020 ruleHave you ever noticed that most of the money in the world is held by a relatively small minority of people? Or, how about that most people tend to work in short spurts of intense productivity followed by larger periods where they are less productive? There’s an underlying principle that can be used to describe such occurrences, it’s known as the Pareto principle, or the ’80/20 Rule’.

Some of you might be familiar with the ‘80/20 Rule’, some of you might not be. For those of you who haven’t heard of it before or need a refresher, according to Wikipedia, “it is named after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas”

The 80/20 rule is popular in business studies, sales, economics and many other fields. However, today we are going to discuss how the 80/20 rule applies to trading and the significant positive impact the “80/20 mentality” can have on your trading performance.

How the 80/20 rule applies to your trading

Quick note: These are my personal observations over my 10+ years in the market. The 80/20 rule is not an ‘exact’ science, but it does give you a very effective way to make sense of many aspects of trading and how they all fit together. Also, all ‘80/20’ ratios discussed below should be thought of as “approximate” ratios, meaning they could actually be 75/25 or 90/10, etc.

As Yaro Starak points out in his blog post on the 80/20 Rule and Why It Will Change Your Life:

“By the numbers it means that 80 percent of your outcomes come from 20 percent of your inputs. As Pareto demonstrated with his research this “rule” holds true, in a very rough sense, to an 80/20 ratio, however in many cases the ratio can be a lot higher – 99/1 may be closer to reality.”

I wanted to start off with the above quote by Yaro Starak because in trading, the 80/20 rule is more like 90/10 or sometimes even 99/1 as he says.

How often have you heard “90% of traders fail while only about 10% make consistent money”? Often, I am willing to bet. Whilst the exact ratio of traders who make money vs. those who lose money is obviously almost impossible to pinpoint, it probably is somewhere between 80/20 and 95/5. Have you ever thought to yourself “why is trading apparently so difficult that 80 or 90% of people fail at it?” I’m willing to bet you have, and here is my answer to this pervasive question:

Trading is the ultimate “less is more” profession, but it’s also extremely difficult for most people to come to grips with this fact by accepting the following:

  • 80% of trading should be simple and almost effortless, 20% is more difficult
  • 80% of profits come from 20% of trades
  • 80% of the time the market is not worth trading, 20% it is
  • 80% of the time you should not be in a trade, 20% you can be
  • 80% of trades should be on the daily chart time frame, 20% can be other time frames
  • 80% of trading success is a direct result of trading psychology and money management, 20% is from strategy / system

Let’s delve into each of the above points a little deeper and see how you can start applying them to your trading, and hopefully start improving it, significantly.

80% Simple, 20% Difficult

This one is easy. Most of what we do as traders is sit in front of our computers and look at prices going up or down or sideways. This is not by anyone’s standards “hard” to do. Hell, you can put a 5 year old in front of a chart and ask them which direction they think it will go next and they will probably get it right more often than not. The point is this; determining market direction and finding trades is not hard, people make it hard.

I teach price action as you probably know (honestly, if you don’t know that by now you need to checkout this article right now: price action trading introduction), and it’s not simply some strange coincidence that I teach this particular form of trading, I also personally trade with price action…because it is simple (and effective). The trading strategy you use doesn’t need to involve complex computer algorithms, counting ‘waves’ or interpreting heaps of indicators. In fact, most traders get bogged down with trying every trading method under the sun until they either give up or figure out that they were simply over-complicating what should be a very simple process.

The difficult part of trading is controlling yourself via not over-trading, not risking too much per trade, not jumping back into the market on emotion after a big win or a loss, etc. In short, controlling your own behavior and mindset, as well as properly managing your money are the hardest parts of trading, and traders tend to spend less of their time & focus on these more difficult aspects of trading, probably about 20%, when they should be spending about 80% of their time on them.

80% of profits come from 20% of trades

http://www.dreamstime.com/-image25076017If you have followed my blog for a while, you know that I am strong proponent of “sniper trading” and waiting patiently for high-probability trade setups, rather than the high-frequency trading style that tends to put so many traders ‘out of business’, so to speak.

It’s absolutely true that most of my trading profits come from a small percentage of my trades. I like to keep all my losing trades contained below a certain 1R dollar value that I am comfortable with, and if I see what I consider an “obvious” price action signal with a lot of confluence behind it, I will go in strong and make a nice chunk of change on the trade if it goes in my favor. Because I trade with such patience and precision, the winning trades I have typically double or triple the 1R risk I gave up on any of my losers. This way, even if I lose more trades than I win, I can still make a very nice return at year’s end.

80% of the time I am not trading, 20% of the time I ‘might’ be

I might trade 4 times per month on average, quite simply because I am a very picky trader. I don’t like to risk money on a setup that isn’t ‘screaming’ at me or what I like to say is “damn obvious”. Most traders like to trade a higher-frequency trading style, and it’s not a coincidence that somewhere around 80 to 90% of them lose money. They are losing money because they are trading way too much and not being patient or disciplined enough to wait for their strategy to really come together and give them a high-probability entry signal.

Do you see the connection between the fact that most traders lose money (around 80%) and about the same amount of time the market is really not worth trading? Markets chop around a lot, and a lot of the time the price action is simply meaningless. As a price action trader, our job is to analyze the price action and have the discipline to not trade during the choppy (meaningless) price action and wait for the 20% or so market conditions that are worth trading.

This point is the most important in this whole article: I get a lot of emails from beginning and struggling traders and I know for a fact that the main thing that separates the professionals from the amateurs in this business is patience and not over-trading. Traders tend to negate their trading edge by trading during the 80% of the time when the market is not worth trading. Instead of waiting for the 20% of the time when it is worth trading, they simply trade 80% to 100% of the time with very little discretion or self-control, like a drunk guy at a casino. Don’t let this be you, remember the 80/20 rule ESPECIALLY as it pertains to trading vs. not trading. If you think you are trading about 80% of the time, you need to evaluate your trading habits and make it more in-line with trading only 20% of the time and 80% of the time should be spent observing and keeping your hands in your pockets (not trading).

80% daily chart trades, 20% other time frames

The daily chart time frame is my “weapon of choice” as far as chart time frames are concerned. I would say it’s pretty accurate that just about 80% of my trades are taken on the daily chart time frame. I won’t get into all the reasons about why focusing on the daily charts is so much better than lower time frames, but you can click the link above to find out more.

However, I would like to point out that there is also a direct connection between the fact that most traders get caught up trading lower time frame charts and most of them lose money. This fits well with the 80/20 rule in that probably only about 20% of traders really focus on higher time frame charts like the daily chart and somewhere around 20% to 10% of traders actually make consistent money. People tend to be drawn to the “play by play” action on the lower time frame charts, almost like they are mesmerized by the moving numbers and flashing colors…unfortunately, this turns into somewhat of a trading addiction for many traders, that quickly destroys their trading accounts.

80% of trading success is psychology and money management, 20% is strategy

In the article I wrote that detailed a case study of random entry and risk reward, I showed how it is possible to make money simply through the power of money management and risk reward. To be clear, I was not and am not saying that you can make a full-time living as a trader without an effective trading strategy. I am simply saying that money management and controlling your mindset is far more important than finding some “perfect, Holy-Grail” trading system that simply does not exist.

You should be focusing about 80% of your trading efforts on money management and controlling yourself / being disciplined (psychology), and about 20% on actually analyzing the charts and trading. If you do this consistently, I can guarantee you that you will see a very positive change in your trading profits, or lack thereof.

Using an effective trading method that is also easy to understand and implement will give you the mental clarity and time to focus 80% on money management and discipline whilst only needing about 20% of your mental energy for analyzing the markets and finding trades. A lot of traders never even get to this point because they are still trying to figure out how the heck to make sense of their trading system.

 Where to go from here with the 80/20 rule…

where to go nextIf you look back over your trading account history from January 1st until now, ask yourself how many of the trades you lost money on where actually valid occurrences of your trading strategy (edge) versus random gambling-type trades that you entered out of emotion or impulse. I’m willing to be that the ratio of emotional trading losses to losses that were the result of a normal statistical losing trade, is about 80/20…surprise, surprise.

The implication here is clearly that you can eliminate about 80% of your trading losses by avoiding emotional or impulsive trading. The first step to trading with an ‘80/20 mindset’ is to master a simple trading strategy like the price action strategies I teach in my trading courses. As I said earlier, if you do this it will give you the foundation you need to focus more of your time on the real “money makers” in trading, which are money management and your own mental state. Thus, the 80/20 rule in trading is best applied by combining a simple trading strategy and a strong focus on money management and psychology, the synergy of this combination is a very potent force for making money in the market.

nialfuller

About Nial Fuller

is a Professional Trader & Author who is considered ‘The Authority’ on Price Action Trading. He has a monthly readership of 250,000+ traders and has taught 15,000+ students since 2008.
Checkout Nial’s Professional Forex Course here.

Now I want to hear from you! - Click Here to Leave a Comment

50 Comments

  1. Hendri says:

    Thax for sharing Mr. Fuller. Excellent insight from you. Success for you

  2. anand H S says:

    thanks sir for these great articles….you have completely changed my way of looking at the market..now I slowly but steadily following your system and seeing great improvement in my trading results….thank you once again….respect for you always……..))

  3. Lachezar Stamenov says:

    Absolutely true. Since paying most attention on 1D and 4H charts I managed to improve my trading.

    Thank you Nial.

  4. Tshidi says:

    Wow!!! Amazing!!! I wish I had known all of this before I blew up my account. Thank you so much!!!!!

  5. Johny says:

    Nice thank you!

  6. nesbert says:

    Thank you very much Nial. keep your good work up.

  7. Izu says:

    Like always, your articles are inspiring and helpful. Thank you.

  8. Nader says:

    Thank for your informative articles here. You will surely broaden our horizon in Fx Traing

    God Bless You

  9. umar says:

    The lesson is very useful thank you

    1. anand H S says:

      thanks sir for these great articles….you have completely changed my way of looking at the market..now I slowly but steadily following your system and seeing great improvement in my trading results….thank you once again….respect for you always……..))

  10. Eve says:

    Damn good obvious article !

  11. Shahzad Ahmad says:

    Great job you are doing, In real it is virtue.. Allah Bless You…

  12. Lyla D. says:

    Been interested in forex and this article will certainly be of help. Thanks!

  13. Tim DeBoda says:

    Looking at 100% of your trades, don’t you have to go through the 80% to get to the 20% not matter how many or few trades you make?

  14. Mide says:

    Good day Mr Fuller. Keep up the ace information! I’m about to enter the Nigerian market. I also want to get into the FX market but I can’t get a hang of the demo platform you directed us to. I read Francesca Taylor’s Mastering Derivatives Markets and apparently algorithms are the big thing in FX trading. Do direct me accordingly so I build a healthy portfolio that includes FX on a recognized platform. I will be looking into buying your Price Action Course as soon as I set up in the FX market.

  15. naveen says:

    Nial sir, I analyzed my trades since 01st January. 80% of the trades were impulse/emotional trades and 20% of the trades matched with my edge. I am unknowing doing these mistakes.

  16. Dave says:

    Nial,

    Great article as I have been reading The 80/20 Principle by Edward Koch. As I read it I thought how I could apply it to my trading and then I came across this post. Great stuff.

  17. Sandile T says:

    hi Nail, yous articles really are helpful to my trading, thank you.

  18. Amira says:

    Hi Nial
    Thanks for explaining all this.
    I really got so many things clear by reading this article.

  19. Nazmul Haque says:

    Nice article Nial, very helpful for me.

  20. JUbaer says:

    One of the Great Article.

  21. naveen says:

    Dear Nial sir, For the past one year I am sticking with your webside and learned lot of things. One of my daily routine is “reading your lesson one per day”. Now, I am closely monitoring my habits. Thank you once again for the excellent article.

  22. Tom H. says:

    Very good article Nial! You have very good insight. I am inspired to get back into trading again.

  23. Gary Clarke says:

    Nial Mate, you always amaze me with the article’s you write. How do you find the time to write such great article’s. I’m glad I’m a part of your community.
    your mate in Vancouver, Canada

  24. pantelis says:

    Once again a great article for developing solid trading habits…Thanks a lot..80% of what you write is perfect and 20% are exceptional…

  25. bala says:

    Thanks Nial. Wonderful post

  26. Isabel says:

    Wonderful article. Thanks very much !

  27. Mohamed Khaled says:

    Our friend Mr. Nial Fuller is not only reading the very close aspects of the MARKET WHEELS, but he is reading as well the very close aspects of the TRADER MINDSET WHEELS.

  28. Prashant Joshi says:

    Self-Control is the key to success.

  29. peter says:

    i couldn’t help but say it all true.

  30. Frankanto says:

    May Almighty God continue to bless you for being a blessing to my life and my trading career.

  31. kevin cunningham says:

    Just reading your news letters have turned me around in trading!!!!!

  32. Anton says:

    Thanks Nial, a briliant lesson as always.

  33. Rizwan Suleman says:

    Another brilliant article, and good advice within it. Excellent and encouraging Article. Trade less, observe more and with patience you can improve ur Trading

    Once agian Great Artical
    Thanks,
    Sir Nail

  34. Chedec says:

    I like this article very much, inspire me a lot. Thanks Nial.

  35. Rushabh Shastri says:

    This is like the “Geeta” The Hindu Greatest Book……

  36. John French says:

    Nial,

    I just spent 330.00$ on your course. After reading this i realize i have spent my money wisely. Not only have you got your stuff together when you talk about forex,you are on top of your game when it comes to life.

    I will be following you for some time to come. I’m glad to have found your presents.

    Best regards,

    John French

  37. joe says:

    Thanks Nial. I almost always ”overtrade”. My demo acct is just below the $5000 I started with. I always seem to jump in when there ”seems” to be a ”possibility” of a trade. I’m a trading junkie. I constantly need to hear the ”truth” that I’m undisciplined and am not ” sniper trading” and need to get back on track, like right now! Even though I’m still chasing after, not so good trades, I have been getting a little better at ”sniper trading” thanks to your constant articles, and one day, I’m sure, it will sink in and I will be trading a live acct successfully. That , I am sure. I love trading. Have been doing it for 13 yrs now, [I’m ashamed to say], but, I have learned so much and since I found you my knowledge of successful trading has increased tremendously and been reinforced and I am again excited about the possibility of making money , if I get disciplined. Your an inspiration Nial.

  38. lyte says:

    Thanks Nial. Today’s lesson reinforces my 80% of being in control of what I do with analysing and managing my money through patience and discipline. I have found overtime I actually trade less but my routine is daily. 20% is when I do trade an obvious price action strategy as learnt through your course with the daily chart being instrumental to my process. Thank you for your continued inspiration and support.

  39. Geetha says:

    Wonderful Article, Sir
    I had never heard of this 80/20 rule, but will surely accept and appreciate todays lesson.
    In simple words quality should be better than quantity.

    Thank U sir.

  40. Stan says:

    Hi Nial,

    Very good article! I ordered the book. Actually had heard of the principle but never got to any in depth study. I will fix that immediately!

    Have a good weekend!

    Stan

  41. Paul Gukiina says:

    thanx once again. the 80/20 rule is wonderful

  42. radiostar says:

    Another brilliant article, and good advice within it. The 80/20 principle can be applied to most areas of life, both business/trading and personal.
    Thanks Nial

  43. GAB says:

    “You should be focusing about 80% of your trading efforts on money management and controlling yourself / being disciplined (psychology), and about 20% on actually analyzing the charts and trading. If you do this consistently, I can guarantee you that you will see a very positive change in your trading profits, or lack thereof.

    THIS HAS REALLY BEEN MY SAVING PRINCIPLE IN FOREX TRADING,MY TRADING IS NOW FAR BETTER THAN BEFORE

  44. Yuriy says:

    Thank you Nial ! Fully agree with you.

  45. Felix says:

    Excellent and encouraging Article. Trade less, observe more, Patience.

    Thank you

  46. Gabriel says:

    Your blog posts are nothing short of Awesome! Thank you for taking the time to put this post together. I’m sure it takes a good amount of time to think through and present quality content on a blog post.

  47. sergs says:

    Thanks Nial for these reminders. When I found a trading strategy that works, I make money, but only for a time. I trade using the lower time frames, earn some money, and lose much more, so I have to return to the daily time frame. I realize I need to receive your teachings again and follow them religiously. Now I’m a staunch believer of your doctrines. Thanks. I know my trading, and my life, will never be the same again. May God bless you more.

  48. Karl says:

    My respects…

  49. shay m says:

    amazing.thx nial!

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