1.5. TAKING PROFITS TOO SOON—LETTING YOUR WINNERS RUN

The O'Neil methodology is essentially a trend-following system—you want to be in the market when the trend is in your favor, and you want to capture a large portion of any trend by riding with it for as long as possible. To O'Neil, buying a winning stock is only half the problem, because the key to capitalizing on a big price move in any potential, big, winning stock is in how you handle the stock once you have bought it. As Livermore said, it is the uncommon man who can "sit tight and be right," so sitting with and properly handling a meaningful position in a big, winning stock through the bulk of its upside price move is a big part of how O'Neil makes big money in the stock market. This necessitates adhering to a basic principle that Livermore stipulated when he said, "As long as a stock is acting right, and the market is right, do not be in a hurry to take a profit" (How to Trade in Stocks [Greenville: Traders Press, 1991], 21). You can't make big money in stocks if you don't give them a chance to make big money for you.

O'Neil recommends "take your losses quickly and your profits slowly," because "your objective is not just to be right but to make big money when you are right" (How to Make Money in Stocks, 4th ed. [New York: McGraw-Hill, 2009], 247–272). Trading for quick profits requires that one be constantly active and thinking about the next trade. It is a notoriously busy way to approach the market, and is entirely out of sync with the ideal that O'Neil–style investing tends toward. In our experience, there is nothing easier than making big money in the market once you have latched onto a big winner, because at that point all you are doing is sitting more and thinking less. When your stocks are trending nicely to the upside and you are fully invested, there is, from a practical standpoint, very little to do. You are simply letting your winners run. This is what we like to call "being in the zone," a mental space that derives from Livermore's principle: "It never is your thinking that makes big money. It's the sitting" (Edwin Lefèvre, Reminiscences of a Stock Operator [New York: John Wiley & Sons, 1994], 68).

Richard Wyckoff had his own unique perspective on the idea of cutting losses quickly and letting winners run when he wrote in Stock Market Technique Number 1, "Are you getting rich backwards? Then you are taking two points profit on your speculative trades and letting your losses run. Why not reverse this rule? Limit your risk to one, two or three points and let your profits run" (1933, 52).