Following Neke's posting about HC, MC, and LC trades, I've been thinking of doing some high conviction trades myself. If you're a pure systems trader, any given trade is the same as any other trade. Therefore, you should risk the same for any given trade. However, if you're a discretionary trader, you may perceive opportunities that have the rare percentage of high probability combined with being very good reward/risk. There is great temptation to bet aggressively, to take a substantial risk as % of investable funds. If you're right, it can be fortune making, but if you're wrong, it can also be somewhat devastating.
And you can make any normal trade a Konviction trade by pyramiding in capital as you tighten your stop, provided the price moves favorably. The result: huge position size while maintaining the initial (tiny) risk.........
It can only be devastating under two conditions: i) you are wrong more than you expect ii) you bet too big If you bet moderately and are not much more wrong than you expect, then your losses won't be too bad, even in a nasty losing streak. The lesson is to choose your trading size on the assumption that the current trade will be a loser. If you do that, you will never be 'devastated' if the trade fucks up. It's like warfare - always plan for the outcome you fear, not the one you hope for.
Only in a one-way momentum market. If you pyramid then tighten your stop, the first wobble against you will stop you out; whereas if you had kept your normal position, you would have the staying power to withstand noise like that. There is no free lunch in the markets.
I usually average down into high conviction longs. It's like bottom fishing. I up my leverage from 3-5 to 30-50.
This is what is killing neke. He is guessing. All trades must have the same conviction. None. Otherwise you are simply guessing, and over time, you will guess wrong on a HC trade for the last time.