In business there is a profitability theme that holds true across all industry sectors, and that 80% of the profit comes from 20% of the clients. Trading is a business in many ways and this law, known as Paretto's Law, also holds true here. 80% of the profit within a portfolio will come from just 20% of the trades.

If you purchased a share and held it without any plans to sell it regardless of the current trend, then your results would look similar to –

Very Profitable – 20%

Middle Band with marginal losses and marginal gains – 60%

Very unprofitable – 20%

To be a successful trader, you first have to come to terms with the inevitability of at least 20% to 30% of your trades being unprofitable. To expect to come out with a profit 100% of the time is unrealistic and often counter-productive. Waiting for that unsuccessful trade to finally prove you right will only result in an increased loss.

The first rule of trading is to trade with the trend. The second rule of trading is to minimise losses.

If 20% of the trades will be become very unprofitable, then they must be identified and exited before the large loss is incurred. You can never avoid such trades, but you can significantly reduce their impact. The way to do this is have a predetermined exit point, and exit once the share falls to this price. This concept is called stop loss.

The process of actively managing your portfolio is called risk management. Risk is inherent in any investment. Share trading is a process of managing risk with strategies that include a floating stop loss, a defined trading plan and diversifying the portfolio.