September 8 2010 Trade Review and Word On Conviction

The blog is not dead yet.

I had an interesting trading day with many of my best observations occurring during the live action.

Part of the reason this format has started to bore me is that reflection on action and trading decisions in hindsight is fairly useless.

Who cares what I think now after the fact? It is irrelevant and helps nobody. Those who can not trade look at things in context of the past. I will look to the future and in particular, the hard right edge moving forward.

I suppose I need to stop using the word review and figure out how to make my insight apply moving forward.

Conviction

I laid out my exact premise and reason for getting long at the open in the ES chart. It is worth taking a look at.

I wanted to write about what I now consider the single most important element to successful trading...conviction.

Without it, your trading decisions have little chance of a positive outcome. As I have been saying, picking the correct price and direction is will not make you a profitable trader.

It actually has very little to do with your PNL. This debunks the concept of trading with a static strategy or fixed indicators. Many of you have witnessed how your setups look so clear at the end of the day but you lost money.

This is by design. The price moves efficiently and the process of the live auction coming to a fair price creates a completely random path from point A to point B with respect to any specific entry and exit point.

This means that anything can happen after you enter and your edge as well as your odds of success are dynamic. Your chance of booking a profit is rapidly shifting over a large spectrum of outcomes second by second.

Even with the prefect plan, price, entry, and exit point, the odds are against the retail trader. This is due to the many participants running a seemingly infinite number of strategies.

To put it more simply, thousands and thousands of people are running what could be millions of different strategies with the goal of selling to you at high prices and making you barf out at low prices or vice versa.

In order to overcome this, I must trade with conviction. I must believe in the trade I have taken and have little doubt about the outcome.

I have found that what works even better is NOT BELIEVING the move against me until proven otherwise. If I am going to lose I want to be SHOCKED at the outcome.

I spent most of my trading career getting pushed and squeezed out of my trades as opposed to my trades failing. I have made adjustments and devised techniques that can combat this issue.

Many do not want to hear this but proper trading probably requires a lot more risk than you want to take. Do you think this extremely efficient market is going to let you enter a trade with a 1 or 2 point stop and let you exit with 7-10 points profit consistently?

This is virtually impossible. Like anything else, there are one or two that can do this but most can not.

My last TF trade today is an excellent example. I had to stick with it through what would seem like ridiculous heat to most. The market does not care if I am down 8 ticks or 50 ticks. It will not respect my wishes to take only 15 ticks heat instead of 16 ticks.

As I was in the trade, I was getting angry at the thrusts down, not because I was losing but because I correctly thought it was BS.

I stuck with what I thought and got out with a small profit.

Important

It takes that type of conviction to win day in and day out. A strategy or methodology alone will not cut it.

You have to be able to this every day whether you are booking profits, broke, sick, tired, hungry, or whatever.

The only way to accomplish that is to trust you gut and be willing to let it lead you off a cliff if that is what it is doing.

If it fails you then you fail. Better that you fail out of principal or flaw in your technique than have the market bullies steal your lunch money everyday.

The concept of perpetually over managing risk is just plain wrong as are most who claim to be able to teach.

Every big trader I have met takes big risk regardless of what their advice is to others. If you think tight risk management is the way to go, watch the Paul Tudor Jones video floating around out there.

Do you think he lets the bullies take his lunch money?