Short TermTrading Weekend Lounge:17-19 Feb, page-67

Interesting responses @valen1828 and @kmac

Kmac your comment makes me think I was probably looking at the question from a narrower perspective than yours, because I was thinking of it as a question of TA vs FA. But whether the price falls below a TA based stoploss or value based (EV/EBITDA or EPS ratios for example) the same thing applies - how far do you let it go based on your conviction, however well researched.

I found in my own case when I looked back at a couple of experiences I had (in these cases btw the SP never recovered) that for me what I had done was become convinced that my FA was sound, even though the market was telling me I was probably or could be wrong. Probably I was overtaken by confirmation bias when I analysed more and more and kept coming up with the same answer - that I was right. Of course history taught me I was wrong, which I didn't realise until too late. Had I stuck to my TA based stoploss I could have stepped out of the trades with either a reduced profit or an acceptable loss, rather than letting them become big losses. Then to step back into the position obviously I would have to undergo the normal decision-making I do before buying in - i.e. justifying why to buy in I think is quite a different headspace than trying to justify why to not get out. But the same principle I think applies if I was using an FA based metric.

In the end those experiences, and lesser examples since, that almost every time I am in that situation I would have achieved a better outcome by getting out (and possibly re-entering later, or not as the case may be) than staying in. The weight of evidence finally got it through my head that I am better off exiting in those situations, even if I am convinced, when my pre-trade exit rule says I should get out.

My conclusion - conviction in that context is a state of mind allowing confirmation bias to over-rule the original trade plan made before that confirmation bias sets in - a dangerous and costly headspace to get into.

Cheers, Sharks.