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Money Management

June 6, 2013

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Money Management System In Forex Using 80-20 Rule

One of the best techniques for money managment in forex is the Pareto law to the trading system, this law states for many events, roughly 80% from the effects come from 20% of the causes, this law can also be known because the 80-20 rule, the Pareto principle, the law of the vital few and the principle of factor sparsity and it was named after the Italian economist Vilfredo Pareto who noticed that 80% of the lands in Italy was owned by 20% from the population at that time.

How Can We Use This As A Money Management System?

While it is not hard to use this principle for that purpose its not easy to keep operating in Forex Market specially for fast traders and scalpers simply because it requires to organize and observe trading , writing down every trade you enter and analyzing these trades digitally to obtain a particular outcome like which pairs would be the best for your trading method and give the best return, what are the best appropriate times for trading and which trading systems are the most profitable trading strategies.

Nonetheless we have to talk about the mechanism of integrating the Pareto principle into money management system for FOREX trading, as mentioned above it is not difficult to use and apply it to the trading system, it’s extremely versatile so you can apply it in many methods like :

  • Some people will observe trades and can from the outcome of this observation focus on the most lucrative 20% of pairs these gave them 80% of earnings throughout physical exercise period which is recommended to be at least three months.
  • Some other people will be focusing time of trading, getting the most appropriate 20% time of trading for them times of effective trades that they produced 80% of successful trades during and of that they are able to know when the most they are trading successfully.
  • Stop loss and take profit points are essential spots to be highlighted by this method, imagine how much will you save if know the 20% take profit points that gave you 80% of the return and also the 20% stop loss points that gave you 80% of your loss, so you can get the best ranges to make use of whenever you setup a take profit or stop loss point.
  • Other people would be focusing on trading systems, indicating that are the responsible systems for the most of earnings or the most of losses in that period of time.

There are lots of other factors in FOREX trading for reaching gain that can be observed and analyzed based on this principle, combining three to four of them would maximize your earnings and decrease your losses dramatically but this really is the most difficult way to maintain a suitable money management strategy utilizing Pareto law as this demands you to observe your trades and organize them for a long time accurately, this only would impact your trading negatively as you’d not have the ability to enter short term trades effortlessly if you don’t have good tools to do.

This really is is recommended to put each element in a spreadsheet separately and trade in a normal mood, following the examining period over you would be having lots of data to analyze and get the results for them, hence you would have the ability to combine the results and get the best overall outcome for the best pairs you are trading profitably, the best take profit and stop loss points ranges and the very best time you are trading them, combining these best results you will have a new result which would be for sure the responsible for around 80% of you return.

Once this get done, you are having a appropriate FOREX money management system that you can depend on, but try to update it always to get the best out of it and notice that 80% and 20% are the theoretical numbers, they will differ for sure while keeping just around them.

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