• Jan

Opportunity cost

The usual reasons of opportunity cost are the traded time frame, the frequency of play and the depth of playbook. Every trader has the same time window to squeeze the opportunities out of market, but every trader has different set of patterns they trade, different trading TF (some high H4, some low such as M1) and every trader is able to input different hours into watching markets every day. This all creates vast area of opportunity costs that arise from those differences.

To sump it up, opportunity cost in trading is created by:

-capital size

-traded time frame

-full time trading or part time (the amount of time / hours that trader can input into trading each day)

-frequency of play

-number of markets traded

-random chance of pattern appearance at that month (some months have higher spawn rate, some smaller)

-efficiency of traders watch-listing and asset tracking trough the day

-depth of playbook (number of traded setups that trader has edge on)

The lower the capital, the higher the opportunity cost. The lower the leverage / margin the higher the opportunity cost.

The higher the time frame traded the higher the opportunity cost.

The lower the frequency of traded pattern, the higher the opportunity cost.

The less markets tracked and traded the higher the opportunity cost.

The weaker the efficiency of multitasking and tracking of markets the higher the opportunity cost.

The smaller the depth of playbook the higher the opportunity cost.

Practical reality

What creates opportunity costs in most cases? High time frames and low frequency patterns or non-liquid markets. This is one of major reasons why trader should prioritize low TFs (time frames) much higher over high TFs , because capital can be quickly free in short term plays and the pattern will re-emerge on lower time frames quicker to be played again.

If there is M1 and H1 play both set up at same time, which one should be taken with priority? It should be M1 play, because that one will be resolved in much quicker time, perhaps even allowing trader to afterwards engage in H1 play. Obviously it should be pointed out, that commissions and spreads do add significant obstracle in making low TFs trading harder and edge thinner, but for sake of this article this is not the priority focus, this article is mainly about cost of opportunity.

In general the whole industry is positioned backwards especially towards beginners and misinformation that is spread around. "Trade high time frames only, due to X and X factor present on low time frames" is what is often preached to most beginners, and maybe you will make 100% gain in month. That is by mathematical default set against reality, low reps give low profits unless you weight those reps with heavy position size (no go), i am not fitness expert but i am pretty sure that is what anyone would tell you there as well.

Practical ways to decrease the opportunity cost in trading

There are many ways to approach this problem, i will list some of actual solutions which might not be fit for every trader. This is especially essential for anyone who wants to make living out of markets with somewhat consistent gains. For hobby trader or someone using trading as a side income this might not be essential to implement.

1.Decrease trading time frame

If one is trading high time frames such as H1, H4 or Daily time frame, trying to switch to lower time frames under M15 might be way to go. By majority, traders will shape their trading based on their personality strengths, so by the second or third year of trading, most traders will essentially have their trading strategy shaped around their preferences and strengths. That is why many traders who are calm and careful action takers and like to take a lot of time for making decisions will usually be drawn to higher time frames, and the traders who enjoy more frantic and quicker trading will be guided towards lower time frames. There is a balance that one should strike, yes follow your strengths but try to go as low as you can on time frames to avoid too much of opportunity cost. It is balancing act.

2.Increase the playbook

Increasing the playbook means that trader has to keep learning new markets, new patterns and new plays. Then researching those and forming strategies around. The more patterns that trader has in playbook the more executions can be made, and the more fluid the equity curve could potentially be, if the patterns and strategies around them have an edge. Again it is a balancing act, because it takes time to adapt to each new traded pattern and one does not want to over-load trading with too many patterns as it can become chaotic. This is not advice per say, because it will hugely depend on how hungry trader is and how passionate to keep digging for new plays and expanding the playbook, not all traders are on same level.

3.Increase the capital on specific traded account / market

Often small capital size can be costing trader the opportunity on taking additional trades, especially if market or broker has low leverage. Increasing capital can solve that problem, but that should not be taken easily. Trader should carefully weight if there were really many opportunities that he / she missed past month because capital was locked in initial trade and he / she was unable to execute additional trade due to that. If that is the case it might be worth adding more capital. Practically for most traders that will not be issue, mainly this will only become issue for seasoned traders who take many trades per day.

4. Increase trading efficiency, watch-listing, alerting, screen time

Some traders are better at multi-tasking and some are not so good, but no matter if good or not, anyone can improve their efficiency of how they actually track the markets and how they track and make their trades. For example a trader could add more monitors to have easier track of more traded assets, or if trader is good at multitasking simply just adding more software and use of alerts will do the same trick. As long as one knows where to place alerts for where the setup might take the development phase of confirmation, it can improve the efficiency in trading a lot and especially decrease the screen time of tracking. It is something that can benefit any trader to implement into their trading routine, learn to use alerts along your setups and know where to place them so that you can take your eyes off the asset and place them somewhere else and decrease your opportunity cost.

Use hotkeys and specific indicators that can help you quickly calculate position size, SLs, targets or similar things. This can have impact on opportunity costs as it makes you calmer trader and more organised. Majority of equity and futures trading softwares allow use of hotkeys, and majority of FX and futures allow use of indicators for trade management. Crypto is lagging behind but getting there slowly.

Bellow is example of alert use on equities (in case of ticker ALT there was interest for short entry around where the alert lines were set). Once the alert is set, trader can move forward to some other asset. Anyone can try to use this method and shape it a bit differently to fit it to personal preference to decrease opportunity costs in trading.

On MT4 using similar alert system by right clicking on chart and setting alert at the specific price ("set alert"). Same method used in crypto on Binance and Tradingview charts.

5.Keep learning

At the end learning and experiencing new markets will allow trader to increase opportunities the most. It comes at price of capital (loses from mistakes) and the highest price of it all which is time. But that is at the end where the real opportunities grow, gotta put in the time and work to make the fruits grow. Or to use words of Ed Mylett , to collect lifes candy you have to put a lot of work into it and stick to it, only those that stick to it for long enough, get it. Trading industry is great example of such thing.


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