After one takes enough trades, the results will follow a normal distribution where the probability of those returns will move between the mean and three standard deviations, either positive or negative, is approximately 99.7%. This means that the probability of returns moving more than three standard deviations beyond the mean is 0.3%. The fat tail theory states a very small percent of your trades will move beyond three standard deviations.
A simpler version of the fat tail theory is Pareto’s Rule. The Pareto principle (also known as the 80/20 rule, the law of the vital few) as it relates to trading means, roughly 80% of your profits will come from 20% of your trades.
As I was reacquainted with Forex at the beginning of 2019, the first quarter was just finding my way again.
Luckily, I broke about even for the quarter with a 29% win rate.
With one trade covering all my loses.
However, I anticipate this quarter having at least two more fat tail trades (but anything can happen) as I find my edge by staying on the higher timeframes and letting trades ride out for weeks…win, lose or draw. Two open trades at this time include:
And this is why I don’t get hung up on the loses because as long as I cut my loses off short and let my winners ride, the losses will lead to the winners.
This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.