I was reading this article [1] 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 [2] 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 [3] to reduce some risk, or it could leave you feeling even stronger that it’s time to trade aggressively [4]. 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 [5]
[tags]Stocks, Investing, Stock Trading, Trading Psychology, IRA, ETF[/tags]
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