Tuesday, April 22, 2008

The 20-80 rule again?

I was having a chat with an experienced trader the other day... one topic we touched upon is the percentage of people who really made money in forex.

It is generally believed that only 20% of people really made money in forex. The other 80% are losers! Another view is only 5% make money, 15% break even (more or less) and 80% lost money!

Whatever it is, sounds familiar isn't it? Don't we often hear of 80% of bird nest farmers don't make it too?

Is it the Pareto Principle all over again?
i.e. The law of the vital few and the principle of factor sparsity.

This idea originated from an Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. It is a common rule of thumb we find in many real life situations.


















Unfortunately, this seemingly is a 'law of nature' and fact of life!

So it is the same struggle to be on the side of the 20% winners! Hard isn't it?

Don't despair, there is a brighter side to the coin of the Pareto Principle we learn to apply in industry:

















There are several interpretations to this:

Concentrate on the 20% efforts that yield 80% of the results!

or identify and focus on the 20% of factors that attribute to 80% of improvement in results.

You may have known this before. By keeping it fresh in mind always, one will find it helpful tackling issues in many real life events; be it improving your bird farm yields or formulating a winning strategy in trading.

You may identify the 20% of the trading times that yield 80% of your gains!

Is Forex for everyone?
















Well, the obvious answer is certainly a BIG NO!

The next question is why?

A good friend of mine once advised...

If you trade in stocks, you may loose your savings;
if you trade in options & futures, you may loose your house;
if you trade in forex, you may loose your life!

With this mindset, I too shied away from forex for a long time.

My journey began as I was checking foreign currency exchanges rates regularly on internet. Soon I bumped into various trading platforms with free demo practice accounts.

I practiced for months, put in real money with modest expectations... just to make a hundred US$ a day. I will be happy so I thought!

But soon that was achieved.. and being human, greed sank in. I try to double my money and achieved that too. Then I set higher goals.. pushing the limits again, soon I had a hard fall and hard knock too. That is perhaps a good wake up call!

That posed a new challenge.. after the fall I got up an get going again. There were much to learn even if you know all the basics of technical analysis etc. It is an art to be perfected!

I remembered taking up Tae Kwan Do in my younger years. There are many levels of skill to attain. As one progress up the ladder of the game, new skills are to develop at higher levels. One progresses from white to black belt.. even after that, there are different classes of black belts!

So back to the original question, is forex for everyone?

My answer now is:
It is possible for ANYONE who has the courage taking the first step into it; acquires the necessary basic knowledge of trading and technical analysis. Set modest goals and develop skills along the way and persevere through it. It is no easy meat, but the taste of wins are sweet indeed!

As for the friend who gave me the good advice, I don't attempt to change his mind either.

So Forex is still not for everybody! Simple as that.