80-20 System
Introduction
In this guide, we’ll introduce you to the 80/20 System—a straightforward, trend-following strategy that helps capture the bulk of market moves while keeping risk controlled. Whether you're a full-time trader or balancing trading with a day job, this mechanical system reduces the emotional aspects of decision-making and helps you stay disciplined.
Table of Contents
What is the 80/20 System?
The 80/20 System is built on the idea that you don’t need to catch the exact top or bottom of a market move to profit. Instead, the system aims to capture about 80% of a trend’s move by using mechanical rules to enter and exit trades. It reduces the guesswork and helps traders focus on staying with the trend.
Trend and Moving Averages
This strategy uses moving averages—specifically the 20-day or 50-day Exponential Moving Average (EMA)—on a daily chart to identify the direction of the trend. The EMA acts as a visual guide to ensure you’re trading in line with the market’s momentum.
- 20-day EMA: Responds more quickly to price changes, suitable for more active traders.
- 50-day EMA: Slower to react, but often more reliable for identifying longer-term trends.
Big Round Figures for Entries and Exits
Big round numbers like 1.00, 0.90, etc., tend to attract a lot of market attention. In this system, these levels are used for placing entry and take profit orders. Traders capitalize on the market’s tendency to react around these numbers, creating clear points for managing trades.
Risk Management: Stop Loss and Take Profit
The beauty of the 80/20 System lies in its risk management:
- Stop Loss: Typically 20-30 pips below the big round figure, depending on your risk tolerance.
- Take Profit: Always 80 pips above or below your entry point, giving you a favorable risk-to-reward ratio of at least 2:1.
Practical Examples
For instance, when trading AUD/USD, if the trend is up and price is above the 50-day EMA, you might place a buy order at 0.66 with a stop loss just below 0.66 and a take profit at 0.67. This simple setup allows you to enter the market mechanically and let the trend do the work.
Similarly, if you’re trading USD/CHF in a downtrend, you’d look to sell at 0.90, place a stop loss just above this level, and aim for a take profit at 0.89.
Adapting to Different Risk Profiles
The system is flexible, allowing traders to adjust stop losses from 20 to 30 pips, depending on their risk appetite. Those who are more risk-averse can allow more breathing room for their trades, while others may prefer tighter stops for quicker exits.
Conclusion
The 80/20 System is a trend-following, mechanical approach designed to help traders stay disciplined and manage risk effectively. By using daily moving averages and big round figures, the system allows you to step away from the screen and let your strategy play out, helping you capture significant portions of market moves over time.