Every short-term trader has had the experience of exiting a position to preserve a profit only to see the position immediately resume its favorable ways without you on board.
Most traders have kicked themselves for letting these profits get away and have sat on the sidelines watching the position continued to grow without them.
The real pain we experience of illusory profits lost are as powerful as real dollars lost in a losing trade.
Cognitive scientists have reported that the pain of profits lost are three times as powerful as dollars actually earned.
For example if you just completed a short-term trade that earned you a $3000 profit, and you just watched it reverse and saw it move an additional thousand dollars that you just missed, science says that the positive and negative emotions of this trade would probably cancel out and leave you numb.
This is true even if the trade was more successful in execution than your original design.
No wonder the deck is stacked against the individual trader with emotional hurdles like these to overcome.
The real problem with the profits missed is that the negative emotional charge of lost profit is likely to carry over into the decision-making of the next trade.
This negative charge may not be sufficient to cause you to change your rules but it might be.
If it isn’t enough to affect you on the next trade, then the charge will carry over and accumulate with the negative charges of other trades until your self discipline is overcome by the negative energy.
When that happens you might be surprised at the behaviors you are taking that seem to have no basis in your rational mind.
And you would be right.
The accumulated negative charges that live deep in your emotional brain have finally found a way to express themselves at the least opportune moment when you fail to take a planned exit and end up getting smoked for a major loss.
For this reason, your exit strategy and decision-making must allow you to get to the zero state at the end of each and every trade as I have discussed earlier.
To overcome the negative emotions of lost profits, a very supportive strategy is to develop a reentry plan that allows you to get back on board quickly once your target is moving favorably.
Then all you have to do is account for the small insurance premium you pay to harvest the profits of the first rate.
Since the original trade already met your strict requirements entry, you may find can relax some of the constraints for reentry and get back on board were quickly.
How you do this precisely will be a function of the nature of your original trading strategy. In general however this is a very powerful psychological strategy that also pays you a reward.