In trading success these two terms plays essential role. However there is a thin line between conviction and stubbornness in trading. Conviction often influenced by the data and it is based on the experienced and observation in the market. Meanwhile stubbornness based on the emotions, when a trader refuses to accept the loss. Instead continues with the losing position until the capital get wiped out or the market reverse. However the conviction may improve the decision making, discipline and trading psychology. On the other hand, stubbornness invites unnecessary losses or impulsive decision and trades.
However the beginner trader often combines these two terms. Meanwhile both has different meanings on the trading context. Developing the awareness about the these terms may initiate the significance change in the trading performance and career.
What Is Conviction in Trading?
Conviction is the confidence in the trading which is driven by repetition of the process and strategy over the long period of time. It is backed by the experience, backtested data and a deep researched analysis. However this gives confidence to the traders to manage the position sizing and risk management accordingly. And remain calm under high volatility circumstances.
Why Conviction Matters
Allows The Proper Lot Sizing: When a trader trades on the high probability setup. Conviction allow them to trade with the bigger lot sizing than usual. Pro traders maximize their profits by trading with the bigger lot sizing. When everything aligns to their favor.
Protects From Early Exit: Trading with conviction allows you to hold the trade till the target price or the stop loss. Meanwhile without conviction often initiates the early exits, whenever the market initiate the minor pullback or correction. This creates panic which leads to the hesitation and confirms the early jump out of the trade.
Filters Out Noise: However it helps you filter out or ignore the noises which is blocking you to take the necessary decision. Meanwhile it allows you to focus entirely on the trade and the strategy.
What Is Stubbornness in Trading?
Stubbornness cover the emotional attachment to the trade or the market bias. This often forces the traders to hold the losing trade until the market reverse. Most of the time stubbornness based on the ego which doesn’t accept of being wrong. Stubbornness forces trader to abandon all the trading rules, indulge with the impulsive and protect losing trade.
Common Pitfalls of Stubborn Trading
Why Traders Confuse Conviction With Stubbornness
Differentiating between the these two terms become the more challenging than anything else. Because both involves confidence and a market view, However both plays different role in the trading. True conviction responds to the evidence, market signals or confirmations. Whereas stubbornness ignore the market data and stick to their analysis and refuses to accept the mistake. Even if the market is showing something else.
The Trap of Confirmation Bias
When a market trades against the favor, the human tendency to search for the validation for their market thesis. Rather than ignoring the voices, they start listening to the noises which agrees with them. These selective tricks leads the trader to believe their stubbornness as the conviction. In reality they are insulting their original belief system from reality.
The Random Reinforcement Trap
The most dangerous trap of stubbornness is the lucky bounce. Sometimes traders holds onto the trade which contravene all his risk management rules. Assuming that the market will bounce back somehow and end the trade at breakeven or in profits. This brain log prevents them from accepting the loss. This psychology make them more stubborn the before, when the next time they face a loss or drawdown.
Defending Ego and Identity
Trader often confuses a trade with their personal intelligence. Accepting the trade was wrong like admitting they are wrong. To prevent themselves from bearing the pain of loss, they find new ways to stay in the trade.
The Difference in What Drives the Behavior
One of the most simplest way to recognize the root of the decision.
Conviction Is Based On A Process: It allows you to stay in the trade in normal volatility conditions because fundamental and technical reasons were there to enter in the trade. Meanwhile it lets you accept the fact that the trade can be a loser.
Stubbornness Is Based On The Past: This allows you continue with the position when it has breached the loss limit.
How to Develop Healthy Conviction
In order to develop the healthy conviction requires the back tested process instead of clinging stubborn opinions. Real conviction relies on the mastering the process, discipline, trading psychology and risk management rules. Always ensure that while trading keep the emotions separate while executing the trade.
Base Conviction on a System, Not Hopes
Focus on a Playbook: Rather than executing on the random levels, aim on developing the proven high probability setup. And before placing the trade, define your entry to exit criteria.
Backtest Rigorously: Conviction is rooted in testing or knowing the strategy. Give yourself time to test the strategy on historic charts data.
Understand the Market Context: While making the execution of any trade, always make sure that the trade’s bias align to multi time frame bias. Analyzing the multi time frame bias will help you placing the trading in the right direction.
Right-Size Your Positions: Over leveraging invites the unnecessary loss, stress and panic. Controlling the position sizing will help you to manage the trade more efficiently and prevents the capital from massive drawdown.
Pre-Define Stop-Losses: Always use a loss limit rule while executing the process. Healthy loss limits let’s your trade run efficiently in the markets. This loss limit automatically allows your trade exit when the loss limit breached.
Ensure Mental Preparedness: Efficient trading requires a well rested healthy mindset, in order to make quick decision. Ensure your mind is in good space before you start your trading day.
Conclusion Words
Conviction and stubbornness may sound familiar or similar but it produces opposite result from the one another. Conviction is driven by the discipline, following the rules and sticking to the same strategy over the long period of time. Where as stubbornness influenced by the ego and strong need to be right.
Successful trader know that profitable trading isn’t about ignoring the market signals and sticking to pre defined analysis. It’s about adapting the circumstances as soon as possible. Observing and then reacting to the market signals.
Strong traders aren’t ones who never accepts the market signals. Strong traders are the ones who makes the right while seeing the changing market conditions.