Hidden losses occur when you do not get out on the best tick. It is impossible to always get out on the best tick and even harder if you are not trading multiple contracts. Not saying everyone should trade multiple contracts, it could also be that your trading plan does not allow it. But I think it should be something every trader aspires to do.
Taking risk off lets you take advantage of “random” market moves. It also has a psychological impact, if/when gets back to your entry price is an easier decision for me. Get out with a small winner or add on, possibly at a better price.
Hidden losses add up, they seem like not that big of a deal compared to not being in the big trade. However, you are always going to remember the trade you “should” have been in. I was observing a client the other day. He was up $850 and took a 4 lot trade. The market proceeded to rally 2 handles. He now had open profit of $1250. Had he gotten out there he would have increased his day by 50%. Instead the market retraced. He got out of some at b/e. When it rallied again but not as high he didn’t take any off again. The market consolidated for a couple minutes and took a tick or two winner. The market eventually hit his upside target.
He had a hidden loss of $350, that adds up and messes with your head. He was trying to prevent not being in the trade when his target was hit but it happened anyways. He once again had the re-enforcing and negative thought that he needs to stick with a trade, taking some off the table makes it easier. It will be re-enforced till he takes some full boat losses. Remember you are a trader not a captain, you do not have to go down with a full sinking ship when you had a chance to find calmer waters. It is easy to know what happens but much harder to know how it happens. That is a subject for another post.
I am not saying he should have gotten out of all 4 contracts when he was up $1250 but it would have been prudent risk management to get out of some and possibly given him the ability to stay in the trade because he didn’t get yo-yo’ed as much and booked profit.
Note: This is obviously an over simplification but hidden losses cause psychologically and potentially financial damage.
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