Following the trading report that I posted previously, I went to scrutinise and find out where my mistakes lie. One of the mistakes was failure to practise profit protection.
William J O’Neill had many pointers on profit protection in his book, “How to Make Money in Stocks“.
By William J O'Neill
Firstly, he said, “If you cut loss at 7% or 8%, take a few profits when up 25% or 30%. Compounding three gains like this could give you 100% or more gain.” Yeah, my cut loss limit is at 8%.
One of the reasons was that his analysis has shown “…that successful stocks, after breaking out, tend to move up 20% to 25%. Then they decline, build new bases, and in some cases, resume their advances.”
And finally, his reminder – “Any stock that rises close to 20% should never be allowed to drop back into the loss column. If you buy a stock at $50 and it shoots up to $60 (+20%) or more, and you don’t take the profit when you have it, there’s no intelligent reason to ever let it drop all the way back to $50 or below and create a loss. You may feel embarassed, ridiculous and not too bright buying at $50, watching it hit $60, and then selling at $50 to $51, but you’ve already made the mistake of not taking your profit. Avoid making a second mistake and letting it develop into a loss. Remember, one important objective is to keep all your losses as small as possible.”
I shall profit protect from now on.
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{ 2 comments… read them below or add one }
hi alvin,
i assume you are somewhat following this book (how to make money in stocks)? how have you done?
i’m a newbie at investing, still comparing the different ways of investing (leaning toward value investing with significant considerations in qualitative factors i.e. Buffett style), so I would like to ask how have you done with ?momentum? trading. I’ve read o’neil’s book before, but am not sure it works.
looking foward to you reply…
Hi Mike, I would say both O’Neill and Buffett methods will work. They are both proven. The only concern is the person practising it. One has to learn in depth, such that he truly understands the concept and diligently follow it. Along the way, especially initial period, there will be much setbacks, and it is up to the person to have the determination and the faith in the system that he chose to use to invest.
Personally, I am following the T3B system for trading which I find its principles closely related to O’Neill’s system (at least for the technical analysis part).
Another way to choose a system is to look which one suits your personality better. You like read charts or annual reports? How about the pace of the investment game? Would you like to enter and exit the market frequently? Or would you like to sit on a position for years?
Find out your cup of tea and have faith in it thereafter. Hope this answers your question.