I was asked the following via an email:

I was just curious if you could share with us your trading objectives. Do you just let your winners run and protect your losses or do you consistently make small gains?

I basically try to perform a balancing act between several trading rules/axioms. I’ve listed four axioms in their order of priority although the bottom three may flip positions on any given day/moment:

  1. Preserve Your Capital: This is always number one for obvious reasons — can’t trade with no capital. I do this by practicing sound position sizing and always entering (and adhering to) stop losses.
  2. Take Big Profits and Small Losses (aka Let Your Winners Run and Cut Your Losses Short): In my experience the 80/20 rule is live and well with respect to trading. (It may even be more like 90/10.) That is 20% of my trades make up 80% of my profits. So my goal is definitely not to make small gains but to try to let the small gains grow as much as possible.
  3. Never Let a Profit Turn into a Loss: This one is tricky. In order to get a big gain you have to give a stock room to fluctuate. So it’s impossible to never let the tiniest of gains slip into the red. But at some point (for me, a 1R gain) I will move my stop loss order to break-even and then keep trailing it to lock in more of my gains.
  4. Don’t Try to Predetermine Your Profits: I don’t like to use targets for exits because you just never know when a stock will become a moonshot. At the same time, as long time readers know, I’ve given back too many gains by trying to adhere to rule #3 above. So I’ve compromised by taking partial profits along the way but still trying to get the maximum gain on a portion of the initial position.

As you can see some of these rules contradict each other. But the bottom line is that I’m trying to keep the losses small (1R or less) while giving stocks enough room to produce large gains. Hopefully the small gains that I get “stuck” with will be more than enough to cover the small losses and a few big gains will pop up along the way.