What is 80/20 Principle? How it will change your trading mindset?

You probably heard about 80/20 principle also known as Pareto Principle.

Let’s understand what 80/20 principle and how it is significance in trading.

Pareto principle was originally developed by Italian economist, Vilfredo Pareto in late 1700’s.

This principle proves the small and effective effort produce the majority of your results.

Few Examples:

80% of the revenue comes from your 20% of the customer.

80% of the sale comes from 20% of the sales reps.

80% of the website traffic comes to 20% of the webpages.

You can apply this anything in your life for studying, sports, diet, work & time management, etc.,

How can we apply in trading?

Consider you a day trader, you have average of 22 trading days in a month.

Let’s go in-depth,

80% of 22 days is = 4.4 days. To round off 4 days in a month is a 20%.

Your 80% of the profits will comes from 4 days in the month.


Let’s go little in-depth again.


I will take my (Simple Trader’s) trading approach as an example.

In any given trading day, I will take maximum of 5 trade. On the average it will be 3 trades,

Considering few days, I will not get any trades, some days 1 or 2 trades in a day.


So,

3 trades X 22 days = 66 trades in the month.

Applying 80/20 Pareto principle here,

20% of 66 trades = 13 trades.

My 80% of the total profits comes through from 13 trades in the month.


But I don’t know when these 13 trades comes to me in the month.


So, What I can do?

I can only follow my trading approach and trade setups with great discipline and reduce the risks in remaining 80% of the trades i.e 53 trades in the month.


Will it work in real time?

I have tested it in my trading accounts it works, sometimes 70/30, 90/10 and most of the time 80/20.

80/20 principle is accepted worldwide, But still don’t blindly believe this without your investigation.

Start applying this rule in you real life and trading.


To understand in much better way, Get in touch with Simple Trader.​


Together We Grow!




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