The hot hand: why a winning streak is dangerous

[Shadow Trader]

A run of winning trades feels wonderful. Confidence builds, and the temptation is to trade bigger or loosen the rules, since everything seems to be working.

That confidence is not based on new information. Winning streaks occur naturally in any strategy with a decent win rate. A streak of six wins in a row does not mean the market has become easier or the trader has improved overnight.

The danger is that behaviour shifts. Position size creeps up, criteria loosen, and trades are taken in conditions that would normally be skipped. When the streak ends, as it will, the damage is larger than it needed to be.

Treating a streak like any other sequence helps. Keep size constant, follow the same checklist, and avoid commenting on how well things are going.

Some traders actually reduce size slightly after a strong run, as a way of protecting profit and keeping humility intact.

How does your behaviour change during a winning streak, and has it ever cost you?