Opportunity Cost

Opportunity cost is the potential benefit or value that is foregone when choosing one option over another. In trading and investing, it represents the return that could have been earned by allocating capital to an alternative strategy or asset. Recognising opportunity cost is essential for making efficient capital allocation decisions.

A prop trader who keeps a large portion of their capital idle while waiting for the perfect setup is incurring an opportunity cost, as that capital could have been deployed in other valid trades generating returns. Similarly, a trader who allocates all their capital to a slow-moving position may miss faster-moving opportunities in other markets. Awareness of opportunity cost encourages traders to evaluate not just whether a trade is good in isolation, but whether it is the best use of their available capital at any given time.