Unlike investors, pure traders do not distinguish between price and value. To them, a stock is always worth what it is selling for in the market. What interests them is not the price level, but the price trend. Their typical strategy is to buy stocks in an uptrend and sell them before or just after the next significant price reversal.
By definition, traders are very active. The process of buying and selling may be repeated several times with the same stock, or simultaneously with several different stocks. The general idea is to boost the compound growth rate of the portfolio by profiting from a series of small, rapid gains.
For example, if the same capital can be successfully reinvested in 3 different stocks each year, with a net gain of 20% each time, the total annual profit will be 72.8%. In practice, of course, traders also have to have a method of dealing effectively with slow-moving stocks and losers in order to stand a chance of making above-average returns.
It cannot be stressed too highly that this makes the use of strict stoplosses mandatory for all traders.
Traders can only succeed if they discipline themselves to take higher profits on average than they do losses. Those who lack the necessary willpower or ability are doomed to failure, since sooner or later their losses and dealing costs are bound to outstrip their gains.
Recommend ReadingBook offers!
