Forex money management is the hardest part of forex trading and most traders simply make errors that doom them to failure. Here we will look at how understanding the 80 / 20 rule and using it in your trading system can make you bigger profits with less risk…
The 80 / 20 rule is simple and states:
That a small number of causes (20%) is responsible for a large percentage (80%) of the effect. The principle was named after the Italian economist Vilfredo Pareto, who noted that 80% of income in Italy was received by just 20% of the population. The value of the Pareto Principle in life and forex trading is – it tells you to focus on the 20 percent of your trading that really matters.
Most traders simply trade too much and the 20% that matters are really just the high odds trades – get rid of the marginal and low odds trades and trade high odds set ups only.
The fact is many traders think the more they trade the better and the more chance they have of enjoying currency trading success. Most try trading the market noise and try forex day trading or scalping – but they are doomed to failure and get wiped out. Trading profits are not correlated to how often you trade, as you are only judged on being right with your trading signal.
If you trade 100 times or twice all that matters is the amount of money you put in the bank from your market timing.
I know traders who trade just a few times a year and make somewhere between 100 – 200% just simply because they wait for high odds trades, hit them and hold them.
Trading less, is more time efficient and more profitable.
Look at any new traders account and they will be over trading and if you make the mistake of taking marginal trades you will lose.
Money management is all about protecting the account equity you a have and if you focus on high odds set ups only, you are going to increase your profit potential overall.
The 80 / 20 rule works in forex trading just as it does in all areas of life and if you use it in forex trading you will focusing on making money and that at the end of the day, is what forex trading is all about.
So think about it, apply it, watch your profits soar and your account equity risk decline and get on the road to currency trading success.