Don't pay dollar to keep 2 cents when wrong. Cut your losses quickly. Trade what you see, not what you think.
Joined Oct 26, 2011
719 Blog Posts

Conviction- which side are you on? Guilty as charged or The state of being convinced?

Previously, in my post on the courage of conviction I reminded everyone why the word courage was needed in the face of “your” conviction of a certain event; today, I like to talk about the degree of conviction we all have on the stocks we own.

Your conviction is a very personal matter and only you hold the key to what you want to believe is “true”; your version of “truth” that is, not the 100% fact of life happened to to your face truth. We all have our own belief of what is true based on what we know or what we “think” we know about everything and anything in our life.  As a result, we all have a tendency to step on other people toes because our version of truth doesn’t match with others.

Nevertheless, in trading, our version of truth is tested at a new dimension because our dollar is on the line.  Not only do we need to extend what we believe is the truth into the future by extrapolating what we think will happen, we are making a bet based on our conviction.  And as we all know, once you tap into the realm of the future, you are automatically tapped into the realm of uncertainty as well. Hence, courage is needed for your conviction of what you believe is the “truth” because your dollar is now at risk.

Now that I’ve gotten the introductory out of the way, let’s talk about what it takes to have conviction.


You know what I mean!  Oh yeah! You DO!

If I’ve ten stocks in my portfolio, I can only muster enough mental energy to have conviction for about 4-5 of the stocks to be considered as position trades.  The rest has to be swing trade because I can’t have 100% of my mental energy supporting the conviction for all ten stocks.  If I even attempt to do so, I will certainly going into tilt very easily (aka short fuse).  And the moment you are tilted (or blow your fuse), you lose your bearing on yourself and everything you know about exercising discipline in trading the market will go out the window.  All of a sudden, you are trading like a degenerated gambler who is secretly “hoping and wishing” the ten stocks you are holding will go up the way you expect it to do even though most of the ten stocks you are holding are tanking in front of you.

The point I’m trying to make is that you must select the few stocks you want to have conviction carefully and systematically.  In other words, you must do your due diligence (DD) to convince yourself that this is the right horse for you to believe in.  One that you can handle the drawdown because you know the prospect of a brighter future is still ahead of you.  If you don’t do your own DD and merely take on other people suggestion, then your conviction may not be strong enough to hold water.

Cases in point:

1) RIMM: Did my DD; plenty of conviction.  Took profit and jumping back in when momentum continued in the direction I was convinced it would. I had quite a good ride with RIMM since November of last year.

2) PACB: Took the trade due to other people alert of a possible breakout. No DD; therefore no conviction. Took profit but did not have the conviction to jump back in.  Missed a huge rally afterward.

Lesson #1: if you didn’t do your DD and therefore had no conviction; it is OK to miss the rally afterward since you are only going to deserve what you get bases on what you put in. You can kick yourself on the behind but don’t punch yourself in the stomach.

Lesson #2: select your stock you like and spend some time to do DD on it.  It can even be stocks you’ve picked up from others.  As long as you have done your own DD on it, you will have built up conviction to trade the stock more productively.

Lesson#3: there is only so much mental energy we each have; so don’t beat yourself up for missing a runner here and there.  Just stay focus on the stocks you have chosen to invest your time to build your conviction on.

In conclusion, let me ask you this, “are you guilty of beating yourself up for watching a trade takes off without you because you did not have the fortitude to hold on to your trade?”

If you answer yes, then do yourself a favor by telling yourself to do some more DD next time to build up some conviction first.  Meanwhile, give yourself a break because you are only getting what you put in.

Trade well!

Oh, btw, I’m only speaking from the perspective of a swing trader/position trader.  There are many out there who do plenty of DD with enough conviction to invest 100% of their investment dollar into their position trades without any swing trade being involved.

Oh, btw #2, even though I talk about position trade and the conviction to withstand drawdown, exercising trading discipline such as setting maximum loss trigger point still applies.


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