The 8020 Rule in Trading. How to implement it correctly.

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The 80/20 Rule in Trading. How to implement it correctly

There is a selection of rules and approaches in any field that can help you be more effective and get better results. Trading on the financial market is no exception. In this case, every investor adopts an entire series of specialized approaches and rules for generating better results, such as strategies, plans, and money management guidelines just to name a few. That being said, other than specialized rules, there are more universally-applicable approaches that can create the ideal conditions for trading financial assets. This article will examine the 80/20 rule, also known as the Pareto principle, and how it can be applied in a trading context.

The empirical 80/20 rule was developed by the undoubtedly brilliant economist, engineer, and sociologist V. Pareto, who in 1906 noticed that this division is present in nearly every economic sphere. For example, 20% of the Italian population owns 80% of all the land and workers can only work effectively 20% of the time, the remainder of the time they are less productive! When analyzing how this rule plays out in daily life, it is worth noting that the ratios can vary greatly from the clear norms. It is not uncommon to see significant divergences, such as 75/25 and 99/1, however, overall the system is applicable and regulates every sphere of human activity. If you were to consider this principle in a wider context, it is worth noting that the basic concept is present in every sphere of life, from health and wellness to economics and finance. The universality of the rule and the ability to utilize it as a tool for improvement has made this approach very popular in various fields of economic, marketing and financial research. We propose examining how the 80/20 rule can be applied to trading.

How do you apply it to trading correctly?

So, financial trading is first and foremost statistics and numbers that are used by traders to generate forecasts and develop strategies. Therefore, it is unsurprising that the statistical 80/20 rule has been widely adopted in this field. It is likely that many traders noticed that they don’t always trade as effectively. A simple example of this is that 20% of trading contracts produce 80% of a trader’s profit. And, of course, many know that only 10-20% of those trading on the market achieve success, the rest lose their capital. Of course, this is the most basic example that demonstrates how effective this rule can be. Speaking more specifically in terms of concrete examples of this principle in action in the sphere of financial trading, it is worth highlighting the following statistical inferences:

в—Џ Market conditions are only good for effective trading 20% of the time, the remaining 80% of the time the market is unsuitable for trading

в—Џ Effective traders are only on the market 20% of the time, the rest of the time they devote to other matters

в—Џ Only 20% of contracts lead to 80% of profit

в—Џ Statistically, 80% of trades placed are simple, the remaining 20% are complex

в—Џ 80% of trading takes place during the day, and 20% in other timeframes

в—Џ 80% of a trader’s success is down to psychological factors, and analysis and strategy only make up 20%

в—Џ 20% of readily-available forecasting tools are effective at market analysis, the remaining 80% of tools don’t give you any useful information

в—ЏThe quality of a technical forecast is 80% down to the analysis of macroeconomic statistics and news and only 20% reliant on technical market data

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As you can see, this principle can be widely applied on the financial markets. Let’s breakdown of the main assertions and run through how they can help improve trading signals.

Trade 20% of the time, relax the other 80%!

The primary trading issue in terms of profit hinges on stability generating accurate trading forecasts. The problem is that the market is chaotic and only forms a clear pattern of rate movement that can be forecasted through specialized tools and approaches 20% of the time. More than likely, all active traders have noticed through observing chart liquidity throughout the day that they can only form relatively few effective trading positions. Other than that, no trading system generates signals stability anytime during the day. All of this is caused by a myriad of factors, the leading of which are macroeconomic drivers and the statistical of traders’ activity, such as total capital, the number of market participants, and interest in any given asset. Of this forms the necessary conditions for applying the basic 80/20 rule.

To put it simply, the market conditions are only ideal for trading 80% of the time. This brings to mind a statistic of successful traders that only 80-90% of investors can achieve success on the market, the rest just lose money.

Many online traders on the financial market try to trade actively despite the 80/20 rule and time management, meaning that the quality of their forecasts and general trading signals decreases significantly. As follows, a large number of contracts placed based on questionable forecasts lead to capital loss, not gain. Consequently, this can be resolved entirely logically using one basic rule, trading is a field where “if you do less, but to a higher standard, you will profit more financially”!

When deciding on an effective time management regime that meets your needs, you should never forget about the 80/20 rule. This will not only help you set up the best trading conditions for you but also increase how effective your trading operations are. Other than that, this trading regime allows you to spend minimal time and achieve better trading signals.

20% of contracts produce 80% profit

In this sense, the rule works flawlessly! Despite the quality or performance of the strategy, for the vast majority of traders, only 20% of their contracts lead to an increase in capital. The reason for this is not only down to technical trading signals, but purely statistics as well. As we already mentioned before, the market is only ideal for trading 20% of the time, meaning that contracts opened at the right times perform best financially. On this basis, first and foremost, without taking into account the level of predictability of the market when a seemingly accurate trading signal has been received, the risk factors of a contract is increased, meaning the level of possible profit.

By using the basic 80/20 rule when determining your financial plans, you will not only correctly and effectively manage your own funds, but also create the possibility of improving your trading results. To put it simply, it isn’t worth pursuing trading positions for little profit, trade patiently under the right conditions and your signals will increase without a doubt!

Simple positions VS complex

This is perhaps the simplest part of the article. It is all logical here, trading on a basic concept is a very simple process! Judge for yourself, what could be easier than following the chart at a certain time, receiving a forecast from your strategy, and placing trades? We are the ones that make it more complicated for ourselves. For example, if a young child, who didn’t know a thing about complex market patterns or how hi-tech indicators worked, was drawn to analyzing the market, they would generate a large number of accurate signals than you! What you should take from this is that you shouldn’t overcomplicate trading, use the simplest approaches for analyzing the market. Therefore, you will achieve the right contrast ratio and you can dynamically increase your profit growth.

However, when considering this question it is worth mentioning that it is also a bad trading approach to completely ignore complex trading positions. By working with complex analysis systems and strategies you can trade more effectively with long-term contracts. That being said, don’t forget about the 80/20 rule and form the right ratio of total trading positions.

Day trade 80% of the time and 20% in other timeframes

Typically, online traders prefer to trade over minimal chart rate periods. It is completely clear why as this leads to more dynamic trading within a 24 hour period. At first glance, such a trading regime appears to be more interesting and lucrative. However, when keeping in mind the 80/20 rule we know that quantity does not equal quality, the opposite is true. And this is why! By analyzing timeframes shorter than daily, traders significantly decrease their scope for analyzing the market, therefore decreasing the quality of forecasts. The reason for this is technical. The issue is that the shorter chart liquidity timeframes, the higher the level of market noise, significantly influencing the effectiveness of any strategy. Moreover, shorter timeframes demonstrate more chaotic fluctuations which are difficult to analyze. As a result, they can lead to losses. In contrast, day charts enable you to see a wider picture of the market, which undoubtedly increases how effectively you trade. This leads to an increase in the market trends forecasted, better pattern identification, and more accurate trading signals. On the basis of this, you could say that the 80/20 rule applied in such a way is an indispensable tool for improving how effectively you trade. For practice, we recommend that you adopt the following approach to trading operations: 80% of the time work on a daily asset liquidity chart, and 20% of the time work on hour or minute timeframes. However, when you are generating forecasts on shorter timeframes, take into account the overall signals from the daily charts. With such a regime you can improve the results of your trading operations by 30% on average!

Achieving success 80% of the time is psychology!В

Many an article has been written on the connection between the psychological state of an online trader and their likelihood of achieving success. However, the 80/20 rule aptly expands on this question. What do we mean by that? Every experienced trader knows what haunts traders, the fear of losing capital, anxiety, and the drive to make more and do it now! On that front, this leads to a loss of discipline and, as follow, financial loss and disappointment! Therefore, when you enter the market, 80% of your attention should be on controlling your emotions and limiting the negative psychological aspects of trading. This will improve your statistical signals. Relax completely, display a high level of discipline. and form contracts with cold and clear calculations. If you do this, you will definitely achieve success. Yes, of course, 20% of your remaining attention should be focused on the quality of your technical analysis of asset liquidity charts.

Conclusions

So as to ensure that you apply the 80/20 rule effectively when trading on the financial market, you can conduct your own simple experiment, examine your own trading statistics over various periods. Without a doubt, you will notice a basic pattern: 80% of your contracts will be losing, 20% will produce peak profit. This will be true of every indicator as well, from the risk level to the choice of optimum time to trade and the cost-benefit of market analysis. Don’t waste your time fighting nature and mathematics, learn to harness it!

So, the 80/20 rule, as you can see, is very effective for trading on the financial market. If you closely follow this approach for increasing how effectively you trade, then you can definitely improve your trading results by the end of this year.

In conclusion, it is worth mentioning that the full potential of the 80/20 rule as it applies to financial trading has yet to be uncovered! That being said, we can speak to the popularity of it and the great potential it has for other applications in the future!

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

80-20 Rule

What Is the 80-20 Rule?

The 80-20 rule, also known as the Pareto Principle, is an aphorism which asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event. In business, a goal of the 80-20 rule is to identify inputs that are potentially the most productive and make them the priority. For instance, once managers identify factors that are critical to their company’s success, they should give those factors the most focus.

Although the 80-20 axiom is frequently used in business and economics, you can apply the concept to any field—such as wealth distribution, personal finance, spending habits, and even infidelity in personal relationships.

The Pareto Principle (80-20 Rule)

Key Takeaways

  • The 80-20 rule maintains that 80% of outcomes (outputs) come from 20% of causes (inputs).
  • In the 80-20 rule, you prioritize the 20% of factors that will produce the best results.
  • A principle of the 80-20 rule is to identify an entity’s best assets and use them efficiently to create maximum value.
  • This “rule” is a precept, not a hard-and-fast mathematical law.

Understanding the 80-20 Rule

You may think of the 80-20 rule as simple cause and effect: 80% of outcomes (outputs) come from 20% of causes (inputs). The rule is often used to point out that 80% of a company’s revenue is generated by 20% of its customers. Viewed in this way, then it might be advantageous for a company to focus on the 20% of clients that are responsible for 80% of revenues and market specifically to them—to help retain those clients, and acquire new clients with similar characteristics.

Core Principle

At its core, the 80-20 rule is about identifying an entity’s best assets and using them efficiently to create maximum value. For example, a student should try to identify which parts of a textbook will create the most benefit for an upcoming exam and focus on those first. This does not imply, however, that the student should ignore the other parts of the textbook.

Often Misinterpreted

The 80-20 rule is a precept, not a hard-and-fast mathematical law. In the rule, it is a coincidence that 80% and 20% equal 100%. Inputs and outputs simply represent different units, so the percentage of inputs and outputs does not need to equal 100%.

The 80-20 rule is misinterpreted often. Sometimes the misunderstanding is the result of a logical fallacy—namely, that if 20% of inputs are most important, then the other 80% must not be important. At other times, the confusion stems from the coincidental 100% sum.

Business managers from all industries use the 80-20 rule to help narrow their focus and identify those issues that cause the most problems in their departments and organizations.

80-20 Rule Background

The 80-20 rule—also known as the Pareto principle and applied in Pareto analysis—was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century. It was introduced in 1906 by Italian economist Vilfredo Pareto, best known for the concepts of Pareto efficiency.

Pareto noticed that 20% of the pea pods in his garden were responsible for 80% of the peas. Pareto expanded this principle to macroeconomics by showing that 80% of the wealth in Italy was owned by 20% of the population.

In the 1940s, Dr. Joseph Juran, prominent in the field of operations management, applied the 80-20 rule to quality control for business production. He demonstrated that 80% of product defects were caused by 20% of the problems in production methods. By focusing on and reducing the 20% of production problems, a business could increase its overall quality. Juran coined this phenomenon “the vital few and the trivial many.”

Benefits of the 80-20 Rule

Although there is little scientific analysis that either proves or disproves the 80-20 rule’s validity, there is much anecdotal evidence that supports the rule as being essentially valid, if not numerically accurate.

Performance results of salespeople in a wide range of businesses have demonstrated success by incorporating the 80-20 rule. In addition, external consultants who use Six Sigma and other management strategies have incorporated the 80-20 principle in their practices with good results.

Real-World Example of the 80-20 Rule

A Harvard graduate student, Carla, was working on an assignment for her digital communications class. The project was to create a blog and monitor its success during the course of a semester. Carla designed, created, and launched the site. Midway through the term, the professor conducted an evaluation of the blogs. Carla’s blog, though it had achieved some visibility, generated the least amount of traffic compared with her classmates’ blogs.

When to Apply the 80-20 Rule

Carla happened upon an article about the 80-20 rule. Because it said that you can use this concept in any field, Carla began to think about how she might apply the 80-20 rule to her blog project. She thought: I spent a great deal of my time, technical ability, and writing expertise to build this blog. Yet for all of this expended energy, I am getting very little traffic to the site.

She knew that even if a piece of content is spectacular, it is worth virtually nothing if no one reads it. Carla deduced that perhaps her marketing of the blog was a greater problem than the blog itself.

Application

To apply the 80-20 rule, Carla decided to assign her “80%” to all that went into creating the blog, including its content; and as her “20%,” she designated the blog’s visitors.

Using web analytics, Carla focused closely on the blog’s traffic. She asked:

  • Which sources comprise the top 20% of traffic to my blog?
  • Who are the top 20% of my audience that I wish to reach?
  • What are the characteristics of this audience as a group?
  • Can I afford to invest more money and effort into satisfying my top-20% readers?
  • In terms of content, which blog posts constitute the top 20% of my best-performing topics?
  • Can I improve upon those topics, and get even more traction from my content than I’m getting now?

Carla analyzed these questions and edited her blog accordingly:

  1. She adjusted the blog’s design and persona to align with those of her top-20% target audience, a strategy common in micromarketing.
  2. She rewrote some content to meet her target reader’s needs more fully.

Although her analysis did confirm that the blog’s biggest problem was its marketing, Carla did not ignore its content. She remembered the common fallacy cited in the article—if 20% of inputs are most important, then the other 80% must be unimportant—and did not want to make that mistake.

Results

By applying the 80-20 rule to her blog project, Carla understood her audience better and targeted her top-20% of readers more purposefully. She reworked the blog’s structure and content based on what she learned, and traffic to her site rose by more than 220%.

The 80/20 Rule: Marketing Strategies to Implement

Are you a follower of Pareto’s Law? If not, it might be time to become one.

Pareto’s Law, or more accurately, The Pareto Principle, tells us that 20 percent of our customers represent 80 percent of our sales. Also, that 20 percent of our efforts produces 80 percent of our results.

Does this apply to community pharmacies? Absolutely, says pharmacy researcher and strategist Lester Nathan, MS, in a Pharmacy Times column, who points out four prospective outcomes for your pharmacy’s future, based on Pareto-influenced strategies. It’s based on “how you differentiate your pharmacy.”

The Pareto Principle is based on observations from the Italian economist Vilfredo Pareto, who, in 1906, found that 80 percent of land in Italy was owned by [and profited] 20 percent of the country’s population. His observations have since been accurately attributed to modern day businesses, including independent pharmacy.

According to Nathan, the Pareto Principle suggests that:

  • About 80 percent of profits come from 20 percent of patients
  • About 80 percent of gross profits come from 20 percent of your space
  • And, approximately 80 percent of your sales come from 20 percent of your assortment [of products and services]

Pharmacy Business Choices and Results

Nathan, in his research, identifies scenarios specific to independent pharmacy and associated successes and failures. His findings surmise the following:

High Margins + High Volume: Nathan considers this choice the most profitable one with “least stress,” which involves strategic marketing know-how (likely a market-oriented organization approach that builds business models that consider all consumers, channels, and suppliers in planning). Nathan cites that pharmacies that choose this path have produced gross profits “in excess of 60 percent” and “net profits of about 25 percent.” He credits a pharmacy’s ability to staff more team members, delegate responsibilities, and take the onus off pharmacy owners needing to directly work in the business 24 x 7.

High Margins + Low Volume: This, according to Nathan, is the next best place to be with respectable profits and low stress. This also relies on choosing and developing the right fit in business models. This is where you could be with few, if any, headaches, and totally devoid of stress. Your profits are significantly high when you embrace the recommended business model, just not as high as with high margins, high volume.

Low Margins + High Volume: Nathan also looks at this business model, which is what many independent pharmacies use today. He observes that pharmacies in this scenario are seeing shrinking profits and experience higher stress in managing the business’s financial results.

Low Margins + Low Volume: This is where pharmacies do not want to be, says Nathan. It indicates the wrong fit in business models. He suggests looking at your Standards of Excellence statement (particularly about gross profitability) to make decisions on how to move up from here.

How can your pharmacy make the right business choices? Similar to what we have mentioned before, Nathan suggests considering the following for your product and service lines:

Compounding: Customized medication compounding is a way to combat one-size-fits-all business blunders. Nathan reports that pharmacies that are successful in compounding often do it on a cash basis with margins of 85-87 percent. Pharmacies that do this often use this strategy in high income areas.

Nutraceutical Products: High-quality, reasonably priced nutraceuticals are a marketing star product (high growth and high margin) that draws business away from big box stores (where top brands are often unavailable). They’re another attractant in higher income areas.

Information Dispensing and Fee for Service Offering: Information is almost as good as the prescription. Package your knowledge and information on chronic diseases and solutions, then provide it to your patients — you can even automate this information distribution through the web or social media (read: write it once and benefit continually). Your expertise will help keep consumers coming back to your pharmacy. It’s a marketing tool that keeps on working for you.

The Right Marketing Approach: Remember when we talked about the market-oriented organization? This is where this approach comes in handy. When you build your marketing strategy based on your consumers, channels, and suppliers — at all levels — you’re constantly offering value beyond the prescription fill, which can lead to more prescription fills and pharmacy visits.

The right marketing strategy can transform you into the source where consumers come to validate (or double check) information they found online. And, once they’re through your door, you can offer them the solutions they’re in search of. Your expertise and offerings are the key to differentiating you from the big box store across town, mail order or a competitor down the street.

Closing Thoughts

While the 80/20 rule (the Pareto Principle) seems simple, it takes a solid understanding and marketing strategy to implement and succeed. But you’re not alone in this effort. We’re dedicated to helping you understand the nuances of successful marketing to maintain the health of your patients and improve your pharmacy’s bottom line.

If you are interested in learning more or becoming an Aspire Health member, connect with us.

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