How the “ Law of the Vital Few” Helps Forex Traders

How the “ Law of the Vital Few” Helps Forex Traders

Submitted by adil on Mon, 11/18/2013 - 09:40

Some works of research are so brilliant, that they will leave some of us cross eyed by over thinking. The 80/20 rule, also known as the law of the vital few, is one such research. I have an intrigue to see this work belonging to philosophy, although its roots lie in mathematics and science. Vilfredo Pareto found this law to exist in nature as well. He found out that 80% of the peas came from 20% pea pods of his garden.

Put simply, the law states that most of the outcomes are attributable to a handful of causes for any given event. From business, software engineering to medicine, this rule has found immense efficacy in each case. For example, in business 80% of a company's sales coming from 20% of its products, in software engineering fixing 20% of bugs of an OS to address 80% of crashes and errors or in healthcare 80% of injuries coming from 20% of vulnerabilities. Vilfredo Pareto already observed the phenomenon biologically in his pea pods.

Largely, the law of vital few is applicable in forex trading as well. Surveys and statistics compiled by leading brokers and experiences of leading traders' exhibit existence of a sort of 80/20 rule in forex. These surveys, statistics and experiences observe that most of the profits originate from least number of trades, except for a small amount of time most of the time the market is not worth trading or that a large number of successful trades are simpler while a few are difficult to execute.

These findings show that most of the forex outcomes, whether positive or negative, are a result of a few causes. This is important information for all of the traders out there. If you observe even your own trading results, you will see that most of your profits come from a few successful trades. The lesson you can derive from this information, courtesy of Vilfredo Pareto, is that you should focus on a small minority of trades. Most of the traders, including me, are too eager to make a number of trades to make more profits. Instead, this attitude leads to losses most of the times.

That said, if you have struck enough forex trading maturity, you will agree that the market is not always providing the opportune setups most of the time. We have to wait and fish those moments out. Therefore, only a handful of times the market provides you with tradable opportunities. During forex trading, many times, doing nothing is the best thing to do. As a trader, particularly as day-traders, you should also realize that simplest trading strategies, techniques and efforts get you rewarded most cost-effectively.

The crux of this discussion concerning forex trading cannot be much simpler; you must focus on small number of trades, be patient for the market to demonstrate odds that are most favorable to you and use simpler tools for trade analysis and execution. The fewer and simpler trades, the better are the rewards, hence the law of vital few.