Conviction goes beyond just thinking that you might have a good trade plan. True conviction in your trading comes from practice and experience of being successful over a sustained period of time with your edge.
For new traders, conviction doesn’t happen overnight. If you want to be successful as a trader then you will need to understand and accept that making money will only come when you have gained enough experience following your edge over a long enough period of time.
How to Build Conviction
There are a few really solid ways to help you gain conviction with your trading. The list that we are going to present here is by no means the only way to gain conviction and you should experiment with what works best for you to keep you on track. The one thing that we will point out here is that lack of conviction always has its roots in poor trading psychology. We have prepared process oriented ways to help build conviction which we have seen many traders benefit from. If you find after trying out our suggestions that you are still experiencing issues with conviction you might want to go on a mission of self-discovery through psychological training to see what makes you tick and why you do the things that you do.
Human beings are very interesting creatures and understanding all the various things that make us do what we do can be a very eye-opening process that will not only point out some of the bad habits that you may have had in trading but also in many other areas of your life as well.
Stop Risking your Money
If you are already an active trader one of the quickest ways to stop the constant stress and start building conviction is to stop trading a live account and start trading on a demo account. Demo accounts will never be a completely accurate way to judge your trading skills but at the very least you can take a bit of the emotional burden off your shoulders and just practice the processes of trading.
There is always a lot of debate on whether traders should use a demo account or a live account when learning to trade. The argument is that a demo account is not an exact replication of the true market environment and that you will not come to gain the same level of psychological understanding as you would with trading on a live money account. And to this argument, we would completely agree. However, we are more concerned with the trader learning the correct process of trading which we think is far easier to do on a demo account that removes a lot of the pressure to perform. The choice, is of course, up to you whether you want to learn to [Trading | trade]] on a demo or a live account but we suggest that if you must [Trading | trade]] a live account please do it with a small amount of money that you are comfortable losing. There is nothing more devastating than making a simple mistake and wiping out a sizable live account.
Understanding and practicing the correct process of trading is by far more important than simply trading on a live account. If your process of trading is not any good and you never stick to your methodology or trading edge the way it was designed then you’re only going to cause damage to both your account balance and your trading psychology. This is obviously not the best way to set yourself up for success.
It’s also worth noting that it’s really easy to develop bad habits in trading. If you start off your trading career with the terrible habit of not sticking to your trading edge or plan then it’s obvious that you won’t gain any real conviction in your trading because you have no way to quantify the results you are getting. How can you quantify or have confidence in a trading edge that you execute differently every time giving you results that you can’t statistically track or even understand? We see this all the time with so many different traders and we can say that people who start off with these bad habits have an incredibly difficult time readjusting to proper habits.
You need to be able to [Trading | trade]] freely without any negative or volatile emotions. Trading on a demo account will allow you to [Trading | trade]] in and out of the markets making decisions based on analysis and logic rather than limiting emotions or misguided gut instincts. If you are an unprofitable trader with poor trading habits your gut instincts will not serve you in any way other than to remove you from your money. Gut instincts will only serve you as a trader if you have been profitable for a long period of time and have seen many different market environments from which to draw your gut instincts from.
Once you have mastered the process of trading correctly on a demo account you may then choose to start back on a live account. We would suggest starting with a small amount of money until you are comfortable. Once you are comfortable and you have maintained your high level of conviction you can then bump up the amount of capital you have slowly so that you don’t put too much pressure or emotional strain on yourself.
Start Trading with Small Amounts of Money and Build Up Slowly
When you are fully confident that you can make money consistently from trading with your well-planned and executed edge then it is time for you to trade live real money account. This is the time that you simply continue to execute your trade plan exactly the same way we were on the demo account. Try not to put any pressure on yourself to perform, just keep the process of trading nice and simple.
Start small and add more funds to your account gradually so that the added pressures of risking slightly more money are never an issue that might start to bring back bad habits. When you put too much pressure on yourself in the heat of battle your brain will sink to the level of your training. Think about that last sentence for a moment. In the heat of battle, your brain will sink to the level of your training is so true in all areas of your life. If you have trained like a prize fighter then you will be just fine but if your training was rushed and full of holes then you will start to experience the old issues that previously plagued your trading efforts. How much effort you put into your training is up to you but know that it is your choice how much you train and your results will reflect your level of training and effort directly.
Let’s look at an example of someone who has $100,000 to invest in their trading business. If you have $100,000 to invest in your trading then starting with a number like $10,000 is a decent idea. You would then [Trading | trade]] this amount until you are comfortable and consistently profitable for a couple of months. If, you find that $10,000 is too much and you start to see bad habits creeping in then withdraw half of the money and see if that fixes the issues. Once you are comfortable then gradually start increasing the size by $10,000 or whatever amount you are comfortable with, every couple of months until you are fully invested and completely comfortable and profitable with trading the full $100,000.
Doing this in a gradual manner doesn’t put too much emotional strain on you and will increase your odds of success over the long run.
This process could possibly take a long time. And you know what? That’s totally fine. You are investing in your future and preparing yourself and this makes you a true professional who stands a much better chance of succeeding over the long run compared to those many people who will come to the markets with their guns blazing. Just like in a gunfight their career as traders is typically over quickly. Again, all things worth having don’t come easy!
Remember to not measure your success as a trader based solely on how much money you make at the end of the day, week, or month. In the beginning of your career, you should consider it a major victory if you are losing less each month. For example, if you lost 10% in your first month of trading but in the second month you only lost 5% then that is a victory worth celebrating because that is a real measurable improvement. The point is to have a trend moving toward profitability through your well-thought-out edge and solid trading practices.
How One Trader Increased Trading Size
Before we move on to the next suggestion to help with your conviction we are going to share a story of how one trader increased his trading size when he first started out as a trader. The name of the trader is unimportant but we will let him write in his own words, just try to take an understanding of the process he went through.
Back in 2006, I started out as a proprietary day trader at a company that had about 2,500 traders globally. I was only trading US equities such as NASDAQ and NYSE-listed stocks which meant that I was trading shares at that time.
As a new trainee, I was only allowed to [Trading | trade]] with the smallest share lot allowed which was 100 shares at any time and was given access to $50,000 of company funds to trade. I quickly discovered that I wasn’t a fan of losses even if it was only a dollar or two each time. So I learned to become the champion of getting in and out with breakeven trades on most of my trades. Soon after I was able to put some winning trades together and started to turn a net profit each day.
At the end of my first month, I was net profitable and had my share size increased to 300 and given $100,000 of company funds to trade. In the next couple of months, I continued to increase my share size and my profitability which meant that I was continuing to get more and more company funds to trade.
When I finally got my position size up to 900 shares while still maintaining profitability I found the psychological number of 1,000 shares to be really intimidating. It was the first time that I finally felt truly uncomfortable with the [Trading | trade]] size and the monetary value of the positions I was taking.
It took me several days to pump myself up and one faithful Wednesday afternoon that I will always remember I finally got the courage after a couple of cheeky lunchtime drinks to take my first 1,000 share position. My target stock was Blockbusters. For those of you that do not know what Blockbuster was, it was a store where you go to in person and actually rent a hard copy of movies you wished to watch. That’s pretty hard to imagine with all the streaming technologies we have today but this shows my age I guess.
I sat at my desk, found my trade setup, and stalked it waiting for the right moment to strike. My heart was pumping hard, adrenaline running through my veins, and my hands were shaking badly but none of that was going to stop me from improving my game and making some cash. Then the setup triggered and I typed in 1,000 shares and hit my buy key with all the courage I could muster.
These days I look back at what happened next as comical but at the time it was anything but. It was a day that defined a new explosive profitability in my trading.
Within a fraction of a second after hitting my buy key the stock absolutely exploded! What was normally a pretty tame stock was now whipping around wildly. A box popped up on my screen that said “daily maximum loss exceeded, your account is locked to close positions only ”. I had no idea what had happened, I was panicking, and I never saw that message before. I immediately started sweating, then literally yelling at my screen like a child, I was completely blind, my entire intellect shut down and I was terrified.
Finally, I noticed my profit and loss blotter swinging up and down $500 per second. I had no idea what was going on. My best full trading day up to that point was around $300 so seeing these massive swings was gut-wrenching. I thought my dream of being a trader was dead right then and there. Then I hear one of the other traders that had come over to watch the spectacle I was creating say “Yo B you have 20,000 shares!” I looked down and the truth of what happened was now completely and utterly apparent. I caused the stock to explode with my massive buy order which was way more than that stock was used to seeing. I was so unable to handle the situation that I punched a hole right through the cheap Ikea desk I was sitting at then let a few choice words flow out of my mouth that I will not write here.
As the story turns out my nerves got the best of me. My hands were so shaky that instead of typing in 1,000 shares I actually typed in 10,000. Then to make matters even worse I double-tapped the buy button. Ask and you shall receive, send a market order for 20,000 shares and 20,000 shares you shall receive! The stock never really had more than 3,000 to 5,000 shares per price level so 20,000 shares wiped out a lot of price levels.
When the dust had settled I actually wound up making around $800 on that [Trading | trade]] and it was off to the pub to celebrate a new milestone in my trading career of finally being able to conquer the 1,000 share number. And conquer I did! Even though it was a complete disaster and mistake on my part, it projected me so far through my "terror barrier" that the very next day I was batting around 5,000 shares like it was nothing. And within 2 months from that moment, I was consistently one of the top 5 daily performers in terms of overall profits within a global company of 2,500 professional traders.
In the trading world, we call this sort of event a “Fat Finger” move. Even though it wasn’t a billion-dollar mistake that we read about in the news it was still the point in my career that I earmark as one of the most important moments in shaping the next 5 years of my prop trading career.
Assess your performance each month
It’s important to keep your eyes on the ultimate prize and learn to [Trading | trade]] consistently over months rather than days or hours. At the end of each month, it should be your goal to lose less than you did the previous month, gradually improving your trading results until you are breaking even and then making a profit.
Assessing your performance on a monthly basis can highlight some fairly basic problems that may be shrinking your profits or causing you losses. It would also be helpful to set up your performance in a simple-to-read spreadsheet that you can share with other traders and get some useful insight that you may not have thought of on your own. Once you know this valuable information then you can make a plan on how to rid yourself of these problems and turn the situation around to start making better trades. Remember, it’s about the process of trading first and the profits second.
A good way to make life easy when tracking your trading results is to have a spreadsheet or written paper that tracks all of your trades for the month. You can track things such as what your initial target and stop losses were at the time of the trade and then compare what the actual results were and why you made the decisions that you did. You can write out how you were feeling before, during, and after the [Trading | trade]] to see if you have nagging issues that you might need to address and fix.
Don’t get too carried away with tracking every single tiny piece of data in your trading. Just focus on the major items that you can work on and make a plan to improve your overall results.
There is no right or wrong answer for how long it should take you to become consistently profitable. We would argue that it is more about the quality time you spend with the market trading with the correct principles than about how much time you spend in front of your trading screens. Quality over quantity as they say. We would rather invest in a trader that has only been trading for a year but has proven that the way he traded was in a professional manner than some trader that has been trading for ten years and still can’t make a profit year over year. The chances are that the ten-year trader has more bad habits than can be fixed and probably doesn’t want to fix them because he is stuck in his ways. The quality trader will always beat out the quantity trader every time.
Focus on Fundamentals and Sentiment
In order to have any chance of becoming a great success in the Forex market you absolutely need to change your reliance on technical strategies, indicators, trading robots, or any strategy that involves simply staring at a Trading_Tools#Charting_Software price chart for a trading signal. This is not to say that you shouldn’t use any Technical Analysis. Professional traders definitely do use technicals but with a mix of 80-20 or 90-10 fundamentals to technicals being the more appropriate ratio for successful trading. Other markets such as stocks, bonds, futures, etc also rely on understanding the fundamentals and sentiment situation.
It is important to stay tuned in to the live news feeds to keep up to date on what is happening with the current fundamental and the sentiment situation of each currency that you plan on trading. Don’t worry if you don’t know what the fundamentals and the sentiment are at this point. We will devote a great amount of time and effort to help you understand these concepts in other Wikis. For now, we just want you to be aware that understanding these two concepts can have a radically positive impact on your trading psychology because they are what is causing currencies to move and you always want to be on the right side of the professional market.
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