Money management in Forex is the hardest part of forex trading and most traders just make mistakes that set them up for failure. Here we will look at how understanding the 80/20 rule and using it in your trading system can lead to higher 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 is named after the Italian economist Vilfredo Pareto, who noted that 80% of income in Italy was received by only 20% of the population. The value of the Pareto Principle in life and currency trading is that it tells you to focus on the 20 percent of your trading that really matters.
Most traders just trade too much and the 20% that matters is really just the high odds trades – get rid of the marginal and low odds trades and trade only high odds setups.
The fact is that many traders think that the more they trade, the better and more chances they have of enjoying success in forex trading. Most try to trade on the noise of the market and try day trading forex or scalping, but they are doomed to fail and get wiped out. Trading profits are not correlated with how often you trade, as you are only judged on hitting your trading signal.
Whether you trade 100 times or twice, the only thing that matters is how much money you put in the bank from your market time.
I know traders who trade only a few times a year and earn 100-200% simply because they wait for trades with high odds, 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 marginal trading you will lose.
Money management is all about protecting the account equity you have and if you focus only on high odds setups you will increase your overall earning potential.
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 be focused on making money and that, at the end of the day, is what you are about. deals with currency trading.
So think about it, apply it, watch your profits increase and your account principal risk decrease, and be on your way to forex trading success.
