Trading Conviction and Flexibility

A large part and critically component of a successful trader is building up enough conviction and flexibility in ones trading signals.

You have to have a system or systems for generating your own trading signals  for a variety of reasons.  Then you need to have the conviction to actually place the trade when the variables of your system present themselves.

As for second guessing your trade, I absolutely play out different scenarios for what can happen even after I establish my position.  I don’t like to call it second guessing.  I call it more doing proper due diligence while you have a position on so I am not caught unprepared.

You don’t want to second guess your trading system because some external factors completely unrelated to your trading system come into play and sway your decision.

For example I  had a time period where I was planning on entering the market with a limit order.  My trading strategy had lined up, the variables presented themselves, and I was ready to enter the order into the market.  Only problem was that a trader that I knew and who I knew was a good trader  had the exact opposite viewpoint as me.  I had a short bias, they had a long bias.  My trading signal was firing off a short setup, but I decided against it as I allowed the external factor to influence my system.

Long story short, my limit order would of been executed and it would of turned out to be a great trade.  To add insult to injury it wasn’t just a great trade, but a 10R trade, something that doesn’t happen every day.

That is why you need to develop the strongest possible analysis and have conviction in it.  Even if it means going against the consensus.  Even if it means going against other trader’s opinion who you value highly.

I messed up in the above example because I didn’t investigate the reasons “why” my friend thought the market was going to move.  He listed his reasons, but I didn’t investigate them further.  I just knew that he wanted to be long and I made it cancel out my potential short trade.

Instead what I should of done was to input his reasons “why” through my order flow system to determine if they had any merit.  Then I could of came to a much better conclusion as to what to do.  Instead of taking someones trade analysis, I like to focus on the reasons “why” they believe price will move.  If they have any merit as determined by my order flow system, then I will take them into consideration to avoid the trade, or even reverse it.

Now I have no problem being flexible, taking in information from various sources, and reversing positions very quickly if I process the information through my order flow system and mindset and the result is such.

Either way, what I should of done in the above example was to place the trade, for good or bad, because it conformed to my order flow system.  Even if the trade resulted in a full loss, that would of been a far better learning experience that simply avoiding the trade.  I would rather take a 1R loss that was executed according to my system rather than avoiding a trade due to some external factors and missing out on a 10R opportunity.

Heck, nowadays I don’t even care if George Soros is taking the other side of my positions.  I instead focus on the reasons “why” the market will move.  If I believe I have the order flow on my side, I don’t give a damn if Soros is on the other side of my trade.  I will keep the position open.

It happened to me one time last year.  I was short USD/JPY.  Rumors came out that Soros was buying up a few billions of USD/JPY.  I did a quick analysis and thought that the only plausible reason to buy USD/JPY was to bet on Bank of Japan intervention.  I ran the scenario through my order flow system and mindset, determined that intervention was probably not going to happen in my trade time frame.  I kept the short USD/JPY trade, and it payed off.

Even if Soros was right, I wasn’t going to fret.

I always attempt to make the best possible decision using whatever information I have available.  If it results in a 1R loss, then so be it.  I can live with myself and make the money back and sleep at night.

I can’t sleep at night knowing that I missed a 10R profit trade because of some external factors that I let influence my trade.

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