Here’s Where Your Conviction Should Lie

• May 28, 2003
• Dave Floyd

Dave
Floyd is away from the trading desk. Today’s article was written by Bo Harvey. 

Is it
good or bad to have conviction on a trade?
Recently I have come across several statements in the course
of various investment/trading books and articles that relate to “having
investment convictions and acting upon them” or some such effect.

So when is conviction actually
necessary, and when is it harmful?  Without
it at all, a trader would never have the confidence to ever place a trade. 
Yet “too much” of it can kill a trading career, since the markets can
be ‘irrational’ longer than you can be solvent. 
You can probably tell where I am going with this: Conviction, like a lot
of things in life, is a double-edged sword and needs to be examined and managed
appropriately in order to be effective and not destructive.      

Mark Douglas puts it well in Trading
in the Zone:

“Trading is hard because you have to operate in a state of not having to know,
even though your analysis may turn out at times to be ‘perfectly’ correct.
To operate in a state of not having to know, you have to properly manage
your expectations (i.e., ‘convictions.’) In other words, you need to have
some kind of conviction; otherwise there would never be a reason to place a
trade.  The conviction, though,
doesn’t lie with the trade itself.  For
all anyone knows, any specific trade could be a loser because this is a game of
probabilities, nothing more. And having
losers is an unavoidable part of this business. 
There’s nothing wrong with being wrong—