It’s A Fine Line
I was reading this article on trading with conviction recently and it got me thinking about the fine line between having conviction in your trade and having respect for the market.
While I wholeheartedly agree that successful trading does require conviction in your decisions, that element alone will not make you a great trader. There are plenty of times when it’s best to respect the market and allow that to override (or at least influence) your strong belief in a trade.
Take last week as an example. The market had been pounded and stocks were getting cheaper by the day. You may have gotten a strong sudden urge to start buying during the fire sale, but a respect for the downside momentum ought to have talked you out of it, allowing you to wait for a lower-risk entry. Waiting for confirmation that a turn is taking place is always wise. It’s one thing to start building a position into weakness which you intend to hold for a long time (like a position in an index-based ETF for your IRA account), but it’s a different mentality altogether to throw caution to the wind and insist that your timing is perfect and you are 100% correct to go all in, hoping for a home run trade.
So the next time you have strong feelings about a trade, be sure to consider the other side of a trade and have some respect for the market. Either you give the market respect, or it will demand it from you! Taking a look at the opposing side just might lead to an adjustment in your position sizing to reduce some risk, or it could leave you feeling even stronger that it’s time to trade aggressively. Whatever you decide, be sure to stick with your plan once you’ve made it!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Technorati Tags: Stocks, Investing, Stock Trading, Trading Psychology, IRA, ETF
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[…] (2) You have a defined exit plan. This goes for any trade, but it’s especially important if you’re thinking of loading up bigger than usual in a trade. Bigger trades mean bigger numbers, and that means bigger odds that you could get emotionally attached. Knowing your exit before you enter the trade will ensure that if your timing is off, you’ll be less likely to stick around and let the freight train run you over. Remember, the difference between conviction on a trade and respect for the market is a fine line. […]