Conviction (kənˈvikSH(ə)n/) – (1) A firmly held belief or opinion. (2) The quality of showing that one is firmly convinced of what one believes or says.
Conviction? Nail or Bail?
Conviction doesn’t come from a book or a DVD. It doesn’t come from watching others trade, or following the trades of others. It isn’t something you can read and master through study. Conviction is essentially the confidence that you hold both for yourself, and for your overall perception of the situation at hand. How much do you believe in your ability to determine the direction (or future direction) of a stock? Probably the most dangerous threat to your career as a stock trader is the failure to develop confidence in your own trading.
When you enter a trade, there shouldn’t be fear or doubt in your mind. There should be a sense of excitement and nervousness (in a good way), as if you were about to get on stage in front of a bunch of people to receive an award. You can’t wait because you know what’s coming. “A firmly held belief or opinion.” You know that award is waiting for you.
So what happens on the way to the podium? Lets say you stumble and bust your ass in front of the crowd (stock spikes or drops dramatically just after you bought/shorted it). Uh oh… little shot to the confidence there. Your choice from here is to get up and continue (stick with your firmly held belief or opinion), or say screw the award and turn back (close/cover the trade). What do you do?
“I See Your Bet, and I’ll Raise You”
A major benefit of conviction is in position sizing. In a game of Poker, if you have confidence in your hand you may raise the bet. In trading, the setup or pattern is your hand of cards. The more confident you are in your trading idea, the larger size you can take comfortably in your position. On the flip side, if you lack conviction it can make holding any position with size nerve-racking.
For certain traders, consistent position sizing is the right strategy for them. However, the ability to size your positions in accordance with your level of conviction is a key skill, without which many of the greatest traders would not be great.
There are plenty of traders that fear their own ability to tell a good idea from a bad one. As a result, they treat all ideas the same. In the end, the best ideas they have see peanuts for gains and they see numerous losses that chew into their trading accounts. If you don’t begin to trust your own ideas and opinions, you’ll never gather the experience needed to turn that trust into conviction.
Rather than treat every trade as the same, trade more aggressively on the ideas that you feel are your best or most probable, trade a little less on your decent ideas, and don’t trade at all if you aren’t sure or are uncomfortable.
It Takes Practice to Harness the Skill
My son is young, and has developed his confidence throwing a football (American Football to all you non-‘Mericans). I compare this to a lot of things he tries that are new to him (kids don’t respect hard work ethic yet, and expect to be good at everything the first time without any time or practice). When you first start something new, you won’t be great or likely even good at it. It takes practice to harness the skill. When we first started throwing a few years ago, he couldn’t throw it more than 5 feet and every throw was far off (as to be expected). Now, he can hit me from 30 yards in the chest dead on every time. Now, he has conviction in his throws.
Conviction in trading is similar. So to answer the question “How do I develop conviction in my trading?” the answer would simply be repetition. As with anything, the more you do it, the more comfortable, familiar, and confident of the outcome you will be. With a falling wedge pattern for example, a trader that has traded the pattern hundreds of times before versus a trader who may have only traded it twice will obviously hold much more conviction in his trade. He is familiar with the possibilities of over-extensions and has likely been in a very similar scenario in the past, giving him the comfort and conviction needed to be certain in his entries and exits. The veteran trader’s emotions are dimmed, while the new trader is highly emotional.
Although valuable, conviction can be mistaken for stubbornness in certain situations. Don’t ever be too proud to get out. There should be a level of comfort within the trade. This will vary by each trader based on your risk tolerance. Once that level of comfort is breached, accept the fact that you were wrong on the trade, and that it won’t be the last time. You only need 30-50% of your ideas to be right to be profitable if you cut your losses short and let your profits run.
Don’t Burn Bridges, Build Them
If you take a “team” approach to your trading, that is to surround yourself with experienced and knowledgeable traders, this can have wonderful effects on your conviction. Similar to American Football, your individual techniques, strategies and trading skills can play an important part, but your results will likely be better with a team supporting you… even if they don’t know it.
Pull together several sources (analysts, other traders, chatrooms etc.) you would trust to provide you with plausible ideas for trades, and make attempts to trade in alignment with their perception. This isn’t to say just follow what they do. Form your own opinion first from your own ideas, then look to your trusted sources. If their opinions or ending result is in agreement with or similar to yours, you will have higher conviction in the trade.
This same method can also help to reinforce your confidence to recognize patterns or setups accurately. Verification from trusted sources around you. Some of the most successful trade setups that can provide the most conviction can occur when a number of traders independently develop a similar idea.
The Path is Different for Many
I’ve discussed with many traders the different “paths” to a successful trading career. Equities, futures, options, hedging, technicals, quantitatives, fundamentals, books, DVDs, youtube, news. And within those paths are more paths. Equities for example, could be pump and dumps, falling knives, breakouts, reversals/pivots, fibs, …. which path is the right one? It’s for this reason I believe that 90% of traders fail. No conviction. Before they have time to find their stride and learn the lessons of loss, they change their path and everything is new again. Some traders may switch up strategies 5 times or more before they find what works for them.
The truth is that there is no “right” path. My only advice would be to pick a path that works for you and stay on it. Think of the stock market like a city, with you on the south side, and your destination on the north. The fastest way to your destination is a straight path, not making left and right turns everywhere. Don’t take unnecessary detours that only hinder your progress. If you want to find conviction, find your “niche” or strategy that works well for you, and progress towards mastering it.
I’ve reached out to several traders in the trading community to get their insight on what methods they utilized to gain conviction in their trading. I received numerous detailed responses that are much appreciated. Some of the response that stuck out were:
“One thing that helped with conviction is seeing a trade go my way a day/two or three later. Now of course in many cases I had abandoned the position by then but it helped show me my initial feel was right….but as everyone knows just because a pattern has setup/a stock is overbought/oversold/ that move might not happen in the three hours you need/want it to.”
“First part of my conviction was when I turned others off and stopped relying on others watch lists and ideas. Once I had confidence to trust what I learned and listened to myself, that was the first part of my conviction starting. That is where conviction and stubborn/ignorance are misunderstood. New traders who are following others and hanging onto a losing trade and say they have conviction is not conviction, b/c it’s not their own.
Conviction is a psychological dynamic that some people just don’t have in their normal lives either, so it will never resonate into their trading. It’s like a huge trading rolodex in your head you see it thru your eyes and no one else’s, that is what gives you your conviction. Some of my biggest losses have boosted my conviction going forward. Because I believed in the trade and I knew it would work. The reward outweighed the risk from my experiences, and those you go big on.
Sometimes they don’t work, but if you have that conviction you do it again and again and in the long run you see the probabilities are in your favor. Being able to take that loss and have the ability to get right back up and do the same trade again because you know it will work out is conviction in one’s own trading.”
“Conviction can quickly turn into stubbornness when trading. Avoid stubbornness like the plague its the difference between winning & losing.”
“Taking time to study the trading and behavior of a vehicle (ticker) before touching it. Get familiar before throwing money at it.”
“I shut off the P&L and Twitter. I listen only to the plan and the chart.”
All great insights. Again, very much appreciated.
Despite talk of “setups” and “plays,” trading isn’t a game. It isn’t a hobby or some form of entertainment. It’s a highly complex environment with risk around every corner, before you factor in some of the competition. Some of the most brilliant (and well-resourced) people in the world are playing the exact same “game” that you are. Don’t ever forget that.
Take conviction seriously. It comes from experience, nothing more. The more you trade similar setups and see the ending results in realtime, the more confident you will be in your abilities to trade them to your advantage. If the trade doesn’t go your way don’t be stubborn and build up the loss, stick it in your bank of experience on that pattern or setup. Next time, you’ll know to watch for a similar occurrence. If one should occur, you’ll know from prior experience how to react or what to expect next.