Forex Trading Vs Pareto Principle

Quick question. When was the last time you came across something so profound, a golden nugget of wisdom, so real that you couldn’t keep your calm? Fighting the surging urge to pick your phone and ring your best friend about it. You somehow manage to hold it together, but it keeps replaying in your mind like a beautiful melody. You live and breathe it for the next three days, or even a week.

 

 

Brevity is the soul of wit’, is a statement that has always resonated with what I do and how I approach life in general. On this particular day, I find myself pondering on it so much that I search through the streets of my mind. True to my self-inflicted nuance, I come across an even more profound ideal, a concept I stumbled upon many years back. Have you heard of ‘The Pareto Principle’? Even a more significant question is how does it relate to Forex trading, and life in general?

 

The pareto principle is named after an Italian Economist – Vilfredo Pareto, who noted the 80/20 connection while at the university back in 1896. It states that for many events, roughly 80 percent of the effects come from 20 percent of the causes. Pareto observed that in most occasions/events/projects, 80 percent of the output from a given situation or system is determined by 20 percent of the input. A quick example would be the analogy that 20% of employees in an institution produce 80% of the company’s results. Breathtaking, right? Occurred to me more like the case of being busy vs being productive.

 

There are fewer capacities in life that the Pareto Principle applies more than in Forex trading. Less is more in trading. If there was one principle or gospel that I would preach all day to every new trader, that statement would top my sermon pointers. Quoting the legendary trader, Nial Fuller – “Most Traders do not make money in the markets over the long-run for one simple reason: They trade way too much.” Needless to explain, professional traders only place trades that meet the rules in their trading plan. The same way you can’t go hitting on every beautiful girl in the party, hence you end up winning none. World’s most renowned trading legends such as Jesse Livermore and George Soros have been striking for their spectacular precision of picking a few best stocks that only match their criteria as outlined in their trading plan.

 

CFDs trading is a question of fewer quality trades over quantity trades. Professional traders know that there is a thin line between taking many trades and overtrading. The latter has been one of the biggest pitfalls for most beginning traders. The ultimate ‘holy grail’ of Forex/indices/stocks trading lies in the true apprehension and application of the Pareto Principle, in that less is more. It’s a game of percentages and risk to reward ratios. Numbers don’t lie. Let’s work out a practical scenario to prove this analogy.

 

SCENARIO ONE: Trader A takes a total of 10 trades. His rules allow him to risk only 1% of his capital per trade, with a target of 2R. Meaning he is risking 1% to make 2%.

 

Turns out that out of the 10 trades, he wins 4 trades, and loses 6 trades.

 

Means, His profits = 4 trades x 2% profits = 8%

         His losses = 6 trades x 1% loss = 6%

 

Here, we find out that despite experiencing more losing trades (6) than winning trades (4), Trader A is still profitable, 2% profit addition to his portfolio.

 

SCENARIO TWO: Trader B takes a total of 20 trades. He doesn’t have clear-cut guiding rules for his risk exposure and winning targets.

 

Turns out that out of the 20 trades, he wins 12 trades, and loses 8 trades.

 

However, he lost more in his few losing trades than he made in his many winning trades:

 

       Means, His profits = 12 trades x 1% profits = 12%

                  His losses = 8 trades x 2% loss = 16%

 

Here, we find that despite having a higher number of trades, and winning a higher percentage of his trades, Trader B still ends up with a negative 4% on his portfolio. Not to mention he encountered more costs from his broker through spread & overnight swap charges on his many trades. And the mental strain that comes with always watching and worrying about the outcomes of the many running trades. 

 

Not called for, not worth it.

 

This my friends, is a classic example of a case of quality over quantity when it comes to trading. The above two scenarios therefore approves of the practicability of the Pareto Principle in Forex trading. If Vilfredo Pareto is ever proven wrong on his principle in all other spheres of life, then he will have won it with Forex trading. 

 

It’s at this point that we call it a day with today’s hangout. ‘Brevity is the soul of wit’, remember?

 


Attached Files:

Posted By feltonjenkins : 26 September, 2020
Related Article

Money management rules should always be the first thing you need to address when you are considering investing in forex trading.   I am sure that you know by now that forex trading can be a risky business. This is why it is important to  get qualified advice to be able to protect your investments. Finding a good forex broker would be one way of doing this.   A quality Forex broker will give you all kinds of information about how and where to invest your money with foreign companies. Although Forex brokers are not readily available everywhere there are many places to find them.     Some of the best places to find Forex brokers include places such as:   - Large commercial firms - Large banks - Internet   A Forex broker will also be able to help you learn more about Forex trading such as how and when to invest and how much to invest into a specific system. They will also be able to tell you what the minimum investment amounts are.   It would be advisable to check with several different companies before choosing one as each one has different minimum investment amounts ranging anywhere form $5-$500.   Every company also has their own fees and these fees vary from one company to another just like anything else. These fees are generally based on the type and size of whatever transaction you are involved in. Typically the largest fees are invoked when moving from one fund to another or one account to another but it is advised to always be sure you understand exactly what those fees are and how much they are. Remember that fees is how Forex brokers make their money so make sure you know what you are paying and how much.   Remember that this is a person you should feel comfortable placing your trust in. always be very aware of any Forex broker that tells you to place large amounts of money very quickly. A true quality broker will give you the necessary information and allow you time to review it and make an educated decision. Watch out for anyone that seems to be too impatient as they may not have your best interests at heart.   Remember that it is your money and you have the final say about where and how it is invested and how much is invested. Your broker should only be concerned with giving you sound advice not making your decisions for you. Any broker that tries to make the final decision for you should be avoided at all costs.

Everyone keeps asking “What is a Forex practice account?” Most people in the know will answer that it is an added functionality in a forex trading/trial account. And that it allows you to practice trading without the actual risk of losing money. Then comes the other questions... This article will address some of the more common follow up questions to the definition of a forex practice account (demo account).Where do I buy a practice account?You don’t buy one, you rent it out. This is because a practice account comes hand in hand with a forex account/platform. The former is accessible via membership, usually with a monthly fee. Now that’s cleared up, you have two options. Either sign up with a broker that provides a free platform or sign up with a forex platform.Can I get a practice account for free?Yes you can. This can be had using two methods. The first is to sign up for a trial account. The disadvantage is trial accounts only last for about 30 to 90 days. This means your free practice account will last just as long. Of course, there is the alternative of going around signing up for demo accounts each platform at a time. But this will be very inconvenient, and after a few years, you will have exhausted your options. This is because they identify your URL and sometimes, even the CPU’s serial number. This means you either sign up or buy a new CPU.The second method is not actually for free, but technically it is. This is because you sign up with a broker. This broker will charge you a fee. However, in exchange for the fee, you get the services of the same plus a forex platform. Of course you get more by way of service but you also pay more in terms of actual dollars shelled out.Are all practice accounts the same?Essentially, they are. This is because the purpose remains the same. However, the functionality as well as the interface are different. Also, the access to historical data is different, depending on the provider. And in most cases, practice accounts are tweaked in order to function just like a particular platform. Therefore, in reality each practice account is different in feel and in its efficacy.What is the best practice account?The answer depends on your needs as the broker and the forex account the same is tied up with. For example, if you are looking for an autopilot type of account and you are a team player, then you may want to consider Currensee. If you are more off a technical analysis kind of trader, then Multicharts is your primary consideration. If you are an FXPro kind of trader, then cTrader is a good choice; provided of course that you take into consideration the generation of platform it is working with. For example, practice accounts with third generation platforms are almost always better.How do I maximize the use of a forex practice account?This advice will not come as a surprise to you. You only need to do three things. The first is to read the manual. The second is to practice regularly. The third is to analyze what you did right and wrong, then repeat.

If you are thinking of becoming a member of the largest financial community in the world, you are on the right track. The sector is known as Forex where currency pairs are traded by millions of people across the globe. What sets it apart from other conventional trading systems is the advantage of low deposit. With only $10, it is possible to open an account where the investor can take charge of his capital. Not only has this advantage, but the sector also believed every person has the right to trade just like the big players. This is where the leverage comes, allowing to place trades for a large sum of profit with little investment.     The more rewarding it sounds, the more complicated it gets in Forex. Though people are spending money, only a few amounts of investors are successful. The rest find themselves among the losers who have lost the initial capital. Do not lose heart because failure is a pillar of success. This article will inspire you to distract the mind from the fact that money has been lost. Though it hurts it is for your own betterment. Think of the deposit as an investment of this career. The profit will not come back but will surely teach you some valuable lessons to prepare you for the upcoming dangers.   Consider the losing trades as blessings The new traders in Singapore always try to make a quick profit in this market. There is no shortcut when it comes to the trading business. You have to use the Saxo online trading account and execute a trade with proper risk exposure. Even after doing all the hard work, you will often lose a few trades. Consider those losses as blessings and wait for the next trading opportunity. Think about long term outcome and execute the trade with valid reasons. At times, take a break to fine tune your trading strategy.   Mistakes are inevitable It is destined to lose money. Imagine a person who is mining for diamonds. Diamonds are precious and coming across them does not happen always. It can take months for a single piece of this precious rock to be found. The miners do not lose hope and continue to mine until the earth spits out the diamonds. Even with the best strategy, the flaws will always be there. Instead of losing courage, be brave and face the market. As fortune favors the brave, people should not lose hope when there is no profit. Every mistake provides a lesson. Try to find out what went wrong. If everything seems right but losses are occurring, accept it with grace. Wise people have said humans are not learning if they are not making mistakes.   Instead of getting upset, learn from the lost chances The best way to overcome the weaknesses is by changing the mindset. Many often get upset after losing money. When the chart looks so simple, predictable but yet the expected result is not produced, it is natural to get heartbroken. Get yourself together and prepare for the next trades. Every kind of volatility is different, analyze the errors. It can be small defects in the planning that ruined the profit. This is a global competition where millions of dollars are invested in real-time. The professionals are competing and only the best are going to be rewarded. To become successful, a small amount of sacrifice is needed.   What are the losses are surpassing my capital? If the losses persist, maybe it’s time to review your investment and the produced result. While it is not uncommon to get bankrupt, there is still a chance of coming back successfully after developing a complete plan. A break can also help you to assess the situation. Do not trade at a stretch as it will overwork your brain. Try it for a few more months but if the losses continue, maybe it is time to quit trading for good.


Post your comment