Overtrading: The Reality of Opportunity Cost

The main goal of trading is to achieve financial freedom. However, profiting from trading does not necessarily equate to financial freedom. There are significant metrics that should be taken into account in order to determine whether your trading system is actually helping you get closer and closer to that dream of financial freedom. This article provides insight on what to look out for when measuring your performance. 

Returns

An easy way to visualize your actual returns is to divide your total profits over the total hours(days) you have spent on trading. Are you making more money than you do on your regular job/business or are you earning way below minimum wage?

Of course, we should also take into account that trading is a lifelong journey and past performance is not an indicator of future results. However, figuring out how much money you make per hour on trading will help you determine whether or not your system is profitable. You do not necessarily have to quit trading but maybe you have to reevaluate your system. 

The key takeaway is to determine whether or not active trading is truly for you. Perhaps it would be more profitable to just passively invest and work on a different project (e.g. an online business). This is called opportunity cost.

In this scenario, the computation for opportunity cost goes as follows: profits that you could have made from doing something else (e.g. online business) minus the profits that you actually make from trading.. Ultimately, the decision is up to you but this is an important metric to determine whether or not trading is actually making you money.

Composition of your Day

How much time do you spend trading every day? Picture this, if you are trading for 4 hours everyday and you sleep for 8 hours everyday, you are effectively spending a quarter of your time awake on trading. It is easy to get caught up in stocks during market hours but putting things into proportion really puts things into perspective.

Do your returns match the proportion that trading takes up in your day? If it doesn’t, then you can do two things: spend less time trading or get greater returns. The former action is passive while the latter requires more dedication. This choice is dependent on how much time and effort you are willing to put into trading.

Efficiency

Assuming that you spend 4 hours every day trading, do you really need the whole four hours? In most cases, it is worth exploring trading tools such as screeners and price alerts. This will reduce the time that you spend actually trading without having to sacrifice potential returns. Remember, sticking to your trading plan is key to success. If you have a trading plan, there is no real need to monitor the markets yourself!

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Conclusion

Ultimately, we should accept the fact that the key to financial success is to capitalize on our individual strengths. Some people are simply good at trading while others might be even better at something else.

With this said, trading can be for everyone but we should always take into consideration the amount of time and effort that we are willing to put into it. It is important to devote our time to things that we are actually good at in order to increase our impact not just to ourselves but our impact to the world as well.

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