Take lots of small losses and a couple of big wins and you’ll make a lot of money in the markets.
Get rid of losses while they’re little and hold on to profits while they grow.
If a share starts to decline shortly after you bought it, cut it early—you can always get back in later.
The key is to take lots of small losses and a few big wins and you’ll turn a good profit. That’s the winner’s principle.
You should look at your share portfolio holistically. If you let a falling share run on, it will eat into profits from a rising share and you’ll end up losing.
At the same time, let winners run for a while. Don’t be too quick to take profits from a rising share. Sometimes a good riser can be held for a good couple of years. Have the courage to cut losses fast and allow winners to run on for a while; this is a good way to succeed in medium term investing.
The 15/30 rule
Never hold on to a share that falls below 15%—use a stop loss to take the emotion out of it and so that you can rest easy at night.
I consider a 15% loss to be the rock bottom. Ideally though, a 10% loss is the most you should tolerate. The key is to not lose money but when you are making money, make it big.
Make upwards of 30% from your winners before thinking of taking profits. Cutting losers short and sharp and letting winners run long and hard is a key to success.
This table illustrates that well:
If you had this P&L, and each trade had been £5,000 of shares, you would be in profit of £2,500.
Goes to show it really is a percentages game and not the number of trades you win at.
Taking seven small losses and three big wins is a winning strategy!
Take lots of small losses and a few big wins and you’ll make money in the markets. That is the winner’s principle. You’ll find more details in Chapter 7 of the Naked Trader book.