How to Build Trading Conviction and Use It Correctly | Bulls on Wall Street

How to Build Trading Conviction and Use It Correctly

“How did you hold that winner for so long?” “How did you hold through that big move against your position?” “Why did you take so much size?”

What is Trading Conviction?

Conviction is defined as “a firmly held belief or opinion”. In the trading world, you will often hear traders say “that was a conviction trade”. Conviction trades are ones taken with large size, and are often responsible for the bulk of your PNL at the end of the year.

One of the most important characteristics of great traders is sizing big when the odds are in their favor. Not sizing big on your high probability setups is like not betting when you have pocket Aces in Texas Hold’em. You won’t be able to win in the long run if you don’t capitalize on winning trades correctly. Capitalizing on winning trades is just as important as keeping losing trades small.

conviction trading

Knowing the Probabilities

To have conviction on a trade, you need to have an accurate estimate of the probability of the trade becoming a winner. Where does conviction come from? Having a defined trading strategy. This means you have defined what type of stocks you trade, when you trade them, what constitutes as buy and sell signals, and you have rules to protect yourself from your weaknesses. 

You cannot have conviction if you don’t have a proven system you know has an edge. A lot of traders assume the effectiveness of a strategy by just what happened on the last few trades. You need to have a large sample of trades to determine a system’s effectiveness. If you don’t know how the trade SHOULD pan out, you won’t be able to ride the bumps on the road to your target (s) with big size. 

“Competence breeds confidence”. Conviction is derived from confidence, and confidence comes from having a DEFINED strategy with an edge. Psychology does play a role as well of course, but the base of all successful trading comes from knowing what you should be doing during the trading day, and more importantly, what you shouldn’t be doing. And the only way to know this is to have a system and rules.

Differentiating Between Conviction and Stubbornness

This is where many traders go astray. They let their convictions prevent them from cutting a losing trade before it gets out of hand. Even on high probability trades, there is always a chance of them turning into a loser. Having strong conviction on a trade also results from the trader completely accepting the possibility the trade could be a loser.

The misuse of conviction most often occurs with short-selling. You KNOW it’s a junk company that will reverse. But you’re too early and getting squeezed. Instead of using “conviction” to justify a 50% drawdown on a position, cut it, take the small paper cut, and then re-attack higher. Too many traders blow up from a “conviction trade” that’s actually pure stubbornness.

Study Your Best Trades EVERY Day

Your brain needs to see the same setup play out over and over again to build conviction. Just like an athlete trains every day, you as a trader need to train your brain every day. Study your best trades over and over again, and remind yourself how they usually play out so you can take big size on them. What you can do is after you run your morning scans and build your watch list, go back and study past names with similar setups, and remind yourself how they typically play out.


There are many factors that cause a trader to have or not have a conviction. Experience is a big one that I didn’t mention. But I think it all comes back to having a system with an edge, and taking the time to study past charts and scenarios on a daily basis. I will talk more about systematic development in a webinar later this month, so you will understand how to build a system with an edge that suits your needs.

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