From Forex Trading to Life Decisions: Lessons in Evaluating Cost, Risk, and Goals

💭 Thoughts of the week

I've been quite busy recently, trying to sort out a few things in life as I'm making a big decision at this point. Whenever I'm faced with such decisions, I often have a specific approach to thoroughly review them and determine if they align with my current goal.

My previous experience in foreign currency (Forex) trading has helped me develop an interesting way of thinking about decisions. In Forex trading, leverage is used to buy or sell currencies and profit from price differences. Due to leverage, we have a specific approach to manage risk and maximise profitability.

These experience slowly assimilated into my decision making process and with writing this particular post, I’ve sort of organised them in such a way that can show you my thought process whenever I make a particularly large decisions.

1. Cost

   When making a decision, I primarily consider three key resources: money, time, and energy. These resources often have a compensatory relationship, meaning that one may offset the cost of another. When faced with a decision, I assess which resource is the most expensive for that particular choice. It's rare to come across a decision in life that doesn't involve any of these three resources.

2. Stop Loss - what would be the downside if this doesn't work out as I expect?

   I always consider the potential negative consequences of a decision. Risk, in my opinion, involves two main aspects:It is possible to quantify risks from a trading perspective, however it is almost impossible to quantify properly both the probability of the event occuring and the price to pay accurately all the time in most decisions in life.For me, rather than obsessing over quantifying the definite risk of a decision, I focus on improving the risk profile of my decisions. This includes willl be looking at improving the probability of the favourable event to occur, and reducing the cost of a mistake.

   1. The probability of an event not happening as expected.

   2. The price to pay if the unfavored event occurred.

3. Take Profit - what is the goal and why is it important to me?

   There are multiple ways to achieve a goal, just as there are different ways to exit a trade in Forex. Some people set a specific price target, others set multiple take profit levels, and some trail their stop losses to take advantage of potential upside in certain trades. The method chosen depends on the trade and specific circumstances.In life, goals are often easy to define, such as having a fit body, a certain amount of money, or a car. However, as mentioned in previous writings, it's rare to have everything at once. Therefore, I always strive to understand my priorities in life and evaluate how much a specific goal matters to me.For instance, buying a new car may not be a high priority for me at the moment because I already have a reliable second-hand car that serves its purpose. The potential reward may not be as significant for me as it would be for someone in sales who needs to create a positive image for clients. Remember, it's all about what matters to you.

4. Pre-Trade Analysis - should I go ahead with the trade, or is there a better trade for me?

   I approach the final part of the decision making process with the following steps:

   1. Does the outcome justify the risk?If the risk outweighs the outcome, it is best not to proceed.

   2. Is the risk tolerable?While the monetary cost of a mistake is important, the most detrimental cost is on our mental state so never forget to take them into account. Mistakes can demotivate us and feed into our inferiority complex, becoming obstacles to further improvement. Once I feel comfortable with the risk involved, I move on to the next step.

   3. Does the goal really matter to me?As mentioned in previous Weekly Writes, I prioritise my life goals to help me make better decisions. Whenever I make a decision, I refer to my priorities and determine if the goal at hand truly matters to me.

   4. Is the risk justifiable?To justify taking a risk, the potential reward must be significant to me, and the risk itself must be manageable. Another important factor to consider is the risk-to-reward ratio. I can compare this ratio horizontally with others or vertically with past experiences to determine if it is reasonable. If the risk does not offer the expected level of reward or if it is not justifiable, I will analyse and optimise it to increase the potential reward or reduce the risk, thus improving the ratio.It is also important to consider alternative options. However, it is worth noting that going through this process repeatedly will consume time, energy, and possibly money. These factors should also be taken into consideration.

Remember that this is definitely not the ONLY way to make decisions, and a framework is really a decision making tool to help make sure we examine the problems properly before we go ahead. What about you? What are the systems that you follow to make decisions?

💊 Did you know?

The commonly used angiotensin-converting enzyme inhibitors (ACEI) were discovered by Sir John Vane and Sergio Ferreira. They found that the venom from a Brazilian pit viper called Bothrops jararaca contains an agent that inhibits lung ACE. This discovery eventually led to the development of captopril.

To this day, ACEI is still widely used as a medication for renal and cardioprotection purposes.

✍🏻 Quote for the week