Alvin Chow writes informative articles on themes of interest to investors. He is the founder of BigFatPurse.com , loves the financial market, and curious to find out what work and what doesn't work in investing.
Profit Protection
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“.
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.
- See more at: http://www.bigfatpurse.com/2009/05/profit-protection/#sthash.ht8daksx.dpufSource: http://www.bigfatpurse.com/2009/05/profit-protection/
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