Opportunity Cost in Trading

Opportunity Cost in Trading
All traders have gone through a period they wished they
never placed the trades. It could be impulsive and
emotional factor that drove the trader to commit these
trades. These are trades that he wished he can forget
forever and hope to never repeat them sagain.

What is opportunity cost in trading?

Opportunity costs happen when we lose unnecessarily while
we pass up the higher probability trades with higher
reward-to-risk ratio. Everything in life has opportunity
costs and in trading, it's no different. This happens more
often to new traders who do not understand this concept,
usually causing them to blow out their accounts that
shorten their trading career or hobby (however the trader
views it).

When traders first start out, they usually begin trading
without realizing the consequences of how they select their
trades. These unnecessary trades would eventually would
affect the future opportunities to profit and better their
batting average. These trades tend to be losing trades but
without calculating the probability of the success of the
trade. When they lose, the equity has less of a chance of
getting a better trade in the future. This is opportunity
cost. For example, the trade takes a bad trade, loses $300
on the trade. Little by little $300 becomes $500, and then
more. Finally when the market condition has turned in favor
of the trader's strategy, he no longer has the capital to
take advantage of the opportunity.

The other opportunity cost that many don't realize is a
psychological cost. When a trader takes a bad trade, loses
money, regrets for making a bad decision, causing him to be
confused and losing his confidence. This loss of self
confidence will affect the next trade which could be a
high-probability trade. Due to the trader in a state where
he's scared of losing again, he may hesitate on the next
trade that could be the next winner. He will realize it
only after a long while the cause and effect and the
vicious circle this opportunity cost creates.

How does solve this problem? The first thing is to
re-evaluate the trading records and sort out the trades
that were part of the trading plan and trades that were not
(impulsive, on the fly trades). If they are more than a few
at least 10% of the total trades made, then a solution must
be found to eliminate these impulsive or unplanned trades.
Better yet, add the total amounts from these impulsive
trades to get a reality check on the costliness of these
trades. 10% or more is excessive. Most successive traders
would not even permit 1% of the trades based on unplanned
setups. Understand that these impulsive trades tend to lead
more unplanned trades, such as overtrading. This causes
mental exhaustion and leads to losing streaks.

One way to eliminate these trades is to write down and
memorize the setups that are part of the plan. Better yet,
start with one setup/strategy only and trade it repeatedly
until it becomes a routine setup the trader takes day in
day out. This way, the trader knows exactly what to do when
the setup comes up. Once it's proven that he can trade it
with discipline and timeliness without giving in and take
impulsive trade then he can add another setup. This is the
start of the road to recovery from losing opportunity costs.

As for the losing trades that are part of the trading plan,
almost nothing can be done to them. Accept them and move
on. Losses and losing trades are part of trading. No
successful trader ever trade without losses, far from the
truth. Very few successful traders manage to have a
percentage of wins to losses higher than 60-70%. Normally
it's much less, around 50%. So they must accept the fact
that at least 30% or more trades will be turn into losses.

If a trader cannot handle losses, he can either quit
trading or alternative find a new or different strategy
where he can find an extremely high percentage of wins to
losses. But keep in mind that this is a Holy Grail, meaning
it may not exist. If they do, the trader may have to wait a
long time to find such a strategy.

Before taking a trade, make sure to ask if the next trade
will hinder and pay for an opportunity in the future. That
is, if the trade meets all the right condition and rules of
the strategy and not another "intuitive gut feeling" trade
that will add another check on the loss column. Giving up
this type of trades will open up more opportunities for
profitable trades in the future.

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Larry Swing is the President of the popular day and swing
trading site http://www.mrswing.com a place where you can
find free daily articles and videos covering education,
market analysis and picks from Larry and other well known
traders in the industry.

Understanding Your Credit Score

Understanding Your Credit Score
When you apply for credit, whether for a mortgage, an auto
loan, or a credit card, your credit score will determine
whether or not you can secure financing, and what type of
interest rate you can get. While you probably have at
least some idea of how good or bad your credit is, it is
important to understand your credit score and how it is
calculated.

A credit score is a three digit number that ranges from 300
to 850. Each of the three major credit bureaus use this
rating system that was devised by the Fair Isaac
corporation - commonly called a FICO score. Your FICO
score is calculated by measuring three distinct aspects of
your credit.

1.A third of the score is based on your payment history.
If you have defaulted on one or more loans, or been more
than thirty days late making payments on your credit
accounts, your credit score will be adversely affected.

2.The next portion of your credit score is determined by
your credit to debt ratio. If you have a number of credit
accounts close to being maxed out, or if your total debt is
too great, this part of your score will suffer.
Conversely, if you keep your credit balances reasonably
low, your score will be higher.

3.The final part of your credit score takes three separate
factors into account: the length of your credit history,
the amount of credit for which you have recently applied ,
and the type of debt you have. Of the three, the length of
your credit history holds the most weight. If you have
established a long history of repaying your debts on time,
you will be looked upon as less of a credit risk. Another
aspect of your credit score is the number of recent
applications you have. The greater the number, the lower
the score. Finally, the types of credit you carry will
affect your credit score. A credit card from a bank would
have a more positive effect on your score than would a
store credit card. Applying for credit with a finance
company could label you a higher credit risk, and may be
seen as a last resort for someone who could not get a bank
card.

Once your score has been determined and made available to
prospective lenders, it is often the only factor considered
in determining your eligibility for credit and the interest
rate you will receive. A higher FICO score will translate
into savings when you apply for credit. A lower score may
increase your interest rate which may cause you to have to
borrow more money than you would have otherwise.

Also, information provided by credit reporting companies is
not always accurate. You should acquire a copy of your
credit report for inconsistencies and inaccurate items. If
you find any questionable items on your credit report, you
have the right to dispute them and possibly have them
removed.

Once you understand the effect that debt and use of credit
has on your credit score, you can devise a plan to make any
necessary repairs to your credit. As your credit score
improves, you will pay less when you borrow money, and you
will find more and more lenders eager to do business with
you.

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Gregg Pennington writes articles on a number of topics
including loans, debt and credit. For more information
about debt help and credit repair visit:
http://www.onlinemoneysources.net/debt-and-credit.html