Opportunity Cost in Trader

In my 32 years of being involved in the financial business one constant theme remains: There is little differentiation between being successful in life, and in speculating in the financial markets. What many traders have discussed with me over the years is that they learn a lot about themselves after being involved in trading for an extended period of time. Their fears about losing, making bad decisions, and their lack of emotional discipline are exposed when dealing with the vagaries of the financial markets. 

In trading, the starting point is to develop a process that provides opportunities in which the risk is low, the probabilities are high, and the profit potential is at a good ratio relative to the risk. These factors have to be in place before a trade should be taken, but what if a trader is not equipped to discern when that opportunity presents itself?  Or what if the trader does not possess the emotional discipline to be patient or is led by the impulses of fear? 

If one spends too much time in a market that does not offer quality opportunities, there is a cost associated with that. Since we use not only financial capital, but a large amount of emotional capital when trading, we would be better served spending it in areas where we would have a much better payout for the cost. 

I see far too many traders, wasting their time in market environments that are not conducive to consistent profitability. There is a psychological component here as some traders become emotionally linked to certain markets. This happens more often in the stock market as investors usually buy stocks because of a positive story pertaining to a product, or development in the shares of the company they buy. In the futures markets it happens to a lesser extent, but it does happen as people tend to gravitate toward areas of the market that they are more familiar with.

This is why Stock Index futures are the most popular futures contracts among retail traders. 

This is why I tell traders to fall in love with the process rather than any particular stock, or market as this will help them to look for higher quality opportunities across all markets. 
Opportunity cost is important to understand as it requires discipline, and a proven process to have the patience to wait for the high probability opportunities. 

Opportunity cost also has to do with where you expose your capital. In a stock trading session I conducted earlier this month, a stock trader asked me what my thoughts were on buying shares of Ford Motor Co. (F) for the long-term. These shares are trading around $5.00, and I understand the allure of lower priced stocks as they allow retail traders and investors to buy many more shares. Although on a percentage basis the moves can be smaller to garner a good rate of return when shares rally, it also works against those traders when shares decline. 

My answer was that although the stock seems “cheap” there’s a reason why the shares are trading where they are, and in my experience lower priced shares tend to remain there for protracted amount of time so may he have to tie up that capital for many months, or perhaps years in order to get a good return. Instead, I suggested he look at stocks that have a better potential in terms of volatility and a higher price.  

In conclusion, one has to pick their battles in life, those that are worthwhile and will produce the best results. The same applies in the trading arena. Spend your time and energy wisely, in conducive trading environments, and markets. Learning to recognize these, is part of the learning curve, and will take some persistence. Every morning start by asking yourself if your time is being well spent, or if you need to find opportunities elsewhere. Doing this can be a good start, and may lead to better results. 

See you all in the trading room.