How Do You Balance Conviction and Flexibility in Trading?


 To bet money on a position, traders must be reasonably confident that their thesis has merit.

That the current asset price is wrong and that it would go higher or lower.

Their conviction in a trade idea will help them filter out market “noise” and stick to a trading plan.

But successfully managing a position also requires flexibility to minimize losses and maximize returns.

So how do you balance your trading conviction and your willingness to be flexible?

Here are some tips:

Create a clear thesis

Before entering any trade, it is essential to have a clear thesis about why you believe the trade will be profitable.

Having a clear thesis will also help set the parameters for determining if you’re wrong. More likely than not, this is a technical level.

An invalidated technical parameter could become a benchmark to start re-evaluating the appropriateness of the current fundamental environment to your original thesis.

If you have clear fundamental and technical arguments, it will be easier to stick to your plan while still considering the changing market environment.

Be open to getting other sources

It’s easier to stay committed to an idea or a trade when you ignore the other side of the argument.

But ignoring new or other data doesn’t make for profitable traders.

While it is important to have conviction in your trading decisions, it is also crucial to be open to new information and sources of information.

This means being willing to consider alternative viewpoints and to adapt your approach when the market conditions change. By being open to new information, you can help ensure that you are making informed and well-rounded trading decisions.

Practice cutting losers and letting winners run

Cutting losers and moving on requires open-mindedness to admit that the current environment is not working out for your trade.

Meanwhile, letting winners run is a skill you won’t master unless you’re confident enough to press your trade when price action is going your way.

You can read all about techniques for cutting losers and letting winners run but the most effective way to master these skills is to do them and do them often.

If you already have the risk management skill of cutting losers and letting winners run, it is simpler to strike a balance between conviction and open-mindedness.