Stock trading is a very different game from investing. When we trade stocks in the short term, we don’t care at all about valuation (i.e. the company’s true value). We don’t care if it’s a good business or what it does. We only care about the short-term price movement driven by human emotions in the market. In other words, we look at price trends — whether the price is going up, down or sideways.
In trading, we’re getting in and out really fast — within a couple of days or even within minutes. When we see an uptrend, we can buy low and sell high to make a profit. If the price is going down, we can do a short-sell, i.e. sell high and buy back low.
As a result, in trading, the average win rate is about 45% to 60%. We’re only right about half the time, so we always place a stop-loss to protect our capital. We plan our risk-reward so that when we lose, we only lose 1% of our capital. But when we win, we win 2%. This ensures that we make good profits even if we’re wrong half the time.