Mastering Forex with the 37% Rule

Good Morning Traders!

In today’s email we’re going to discuss the following…

• Today’s Market Breakdown

• Mastering Forex with the 37% Rule

MARKET BREAKDOWN

PRO INSIGHTS
Mastering Forex with the 37% Rule

Today, we're diving into how the quirky yet fascinating '37% Rule' from "Algorithms to Live By" can be your secret weapon in the currency markets.

Unpacking the 37% Rule

The 37% Rule, a gem from the world of “optimal stopping theory”, suggests spending 37% of your time exploring and the rest in making a decisive action. Let me explain…

The rule is based on math and decision theory. It's connected to the "Secretary Problem," a math problem that looks at the best strategy for making choices. The main idea is to find the best candidate or choice when you have to decide one after the other and can't go back to previous choices.

In a scenario where you have a certain number of options (e.g., candidates, choices), and you can review each only once (you can’t go back in time and hire one of the candidates that you denied 6 months ago), the probability of making the best choice is maximized if you review and reject the first 37% of the total options without making a decision. After this, you select the next option that is better than all the previous ones.

Here’s an interesting example of this strategy used for dating… 

Applying the 37% Rule in dating involves spending about 37% of your dating time or experiences just meeting and getting to know different people without committing to a serious relationship. Suppose you plan to date actively for 10 years.

According to the 37% Rule, for the first 3.7 years (about 37% of the total time), you would avoid making any serious commitments, regardless of how promising any relationship seems. This period is for gaining experiences and understanding what you want in a partner.

After this period, the next time you meet someone who seems better than anyone you've dated so far or as good as the best person you met, the rule suggests this is the optimal time to start a serious relationship.

You could alternatively go on 100 dates, and start choosing after the first 37, etc.

In Forex, this translates to observing the market. After the 37% 'observation period', the next trade that looks better than everything seen so far is your green light. 

Timing is Everything

Timing in Forex, as in life, can make or break success. Applying the 37% Rule means you're dedicating a specific portion of your trading session to purely learning, not acting. This could mean analyzing the first few hours or minutes of the market's opening, observing trends, and then making your move. It’s about patience meeting opportunity.

The Art of Decision-Making

Post the 37% phase, it's decision time. This rule encourages decisiveness - picking the next favorable opportunity. This could mean choosing a currency pair that shows potential for profit based on your initial observations.

Here’s what this might look like in practice…

For a trader who trades 1 hour per day, applying the 37% Rule would look like this:

1. Dedicate the First 22 Minutes for Observation: Since the you’re active for 60 minutes daily, 37% of this time is approximately 22 minutes. During these 22 minutes, the trader should focus solely on observing the market. This includes analyzing price movements, news impacting the markets, and any other relevant data without making any trades.

2. Make Decisions in the Remaining 38 Minutes: After the observation period, you should be ready to make trading decisions. If, during the remaining 38 minutes, you identify a trading opportunity that seems better than what was observed in the initial 22 minutes, that's the signal to execute the trade. 

This approach encourages a disciplined balance between careful observation and decisive action within the limited trading window.

The 37% Rule is a helpful principle in Forex trading. It emphasizes the importance of observing and taking action based on calculated probabilities.

STOIC QUOTE OF THE DAY

This quote reflects the Stoic belief in the value of challenges and adversity. It suggests that just as physical exercise strengthens the body, facing and overcoming difficulties can strengthen the mind and character. This perspective highlights the Stoic view of adversity as an opportunity for personal growth and development.