Opportunity cost. What? Hearing the phrase outright may have you thinking, yea, obviously to take advantage of an opportunity there is associated costs.
What opportunity cost actually means may surprise you.
One of the most profound lessons I learned attending Liberty University pursuing my degree in Business was the concept of opportunity costs. You’ve probably hear about this concept, but opportunity cost… what?
What does an opportunity truly cost you?
What it really means is, when you decide to take an opportunity, there are others in which you forgo. These are the true cost of opportunity; the things you pass up on doing in order to do something else.
This concept plays a tremendous role in the world of business management. Once you recognize an opportunity, it’s then apparent that in pursuit, you will be passing up on others; even those which are potentially more profitable.
In essence, you are taking a risk.
When deciding to pursue a business idea, most begin by laying out the cost to begin the process and engage.
The expenses of startup, location, inventory, payroll, marketing, etc., are accounted for. You’re attempting to fully grasp how much money is necessary to risk in order to get things started.
While this process is unfolding, consider this; the time and energy you spent on those things, is time and energy not spent doing something else. Therefore, this opportunity is so far costing you time & energy.
Ever hear the saying, time is money?
If you’ve ever been in business, you know how true that statement really is. For many business owners, it can seem there’s not enough hours in a day to accomplish all you desire, and all your business requires.
This is also true for professional traders.
If you’ve traded before or currently, you’ve probably become familiar with opportunity cost already. For example, when you decide to enter a trade, you’ve made a decision to pass on other trades.
Why is this important?
For traders, it is imperative to know the true cost of a lost opportunity. A lost opportunity is no small matter. It can mean the difference between hundreds and thousands of dollars in profits, or losses.
If you decide to take a trade, you are potentially passing up the opportunity to take another profitable trade elsewhere. By committing funds to one trade they cannot be used at the same time elsewhere.
You are tying up funds in the trade for better or worse.
What can traders do about this? Can you avoid risking a lost opportunity?
Some is better than none!
While opportunity cost cannot be completely avoided, it can be reduced to some degree. How?
By diversifying your trades.
Using diversified trading is a significant aspect of risk management and is often overlooked and commonly never even considered.
For most, you probably already know that diversification can lower risk. But as you can see based on the concept of opportunity cost, it goes much further than hedging a trade.
By diversifying your available funds across several different trades, you offer a percentage of your funds to individual risks. Some trades are riskier than others. When diversified you’ll have greater control over how much risk you take per trade.
Each trade carries with it a different percentage of risk vs. gains.
Diversifying your trades lets you spread that risk out, across multiple opportunities. In turn, you lower your overall percentage of risks taken.
Don’t put all your eggs in one basket.
You can designate more funds to trades that your research suggests have a greater probability. In turn you can therefore focus on trades with greater confluences of profit. And, you can protect funds from risky trades that look less certain.
By diversifying in this manner, you can increased your chances of winning trades over losing by providing yourself more opportunities. When you have more trade opportunities, you reduce the opportunity cost of any individual trade while potentially reducing your risk.
You potentially reduce your risk because trades are still dependent on you performing proper due diligence and unseen market factors. By diversifying, the costs of time and energy you spend establishing your startup, or your trades, is spread out.
Now you are essentially expensing the same amount of effort to each idea. And each idea is now offering a prospective value of return for those efforts collectively greater than any individual trade. Now you’re managing your risks!
So, the next time you’re trading ask yourself…,
Opportunity cost… What?
If you want to learn more, pick up a copy of my book, Forex Destiny Trading Complete Training System. I discuss the concept of diversification and how I use it in my own trading system that has delivered over 1000% returns in 2019 alone.
You’ll gain an understanding of many concepts including exactly how my trading system works, and how you can do it for yourself.
People, including myself, have spent years & thousands of dollars for just some of the information I provide in this book. I wrote this book to help you cut through all the noise, reduce the learning curve and get you profitably trading; saving you time and money.
I look forward to helping you discover your own destiny.