Winning streaks

Everyone warns you about losing streaks. Fewer people warn you about winning streaks, and that is exactly why they are dangerous. A run of wins feels like proof that you have figured it out. That feeling is where many of the worst losses begin.

Wins are a small sample too

Lesson 6 showed that runs of losses are normal, even in a sound process. The same math works in the other direction. Runs of wins happen by chance too, even with a mediocre process.

The Nobel committee’s background on Kahneman’s work describes how people over-read short sequences of results, treating a few outcomes as if they were strong evidence. Five wins in a row is a tiny sample. It does not prove your method works any more than five losses prove it is broken.

Overconfidence

Overconfidence means believing your skill or knowledge is better than it really is. A research summary prepared by the Library of Congress for the SEC describes studies of real investor accounts in which researchers linked overconfidence to trading more often, and that extra trading to worse results.

The same summary explains that overconfidence includes self-attribution bias: giving yourself the credit for successes, and blaming bad luck or other people for failures. You can see how that feeds itself during a streak:

• A win? “I read that perfectly.”
• A loss? “Bad luck, the market was weird.”

Each win builds confidence, and each loss gets explained away. After a while you are no longer learning from your results; you are only collecting compliments from them.

What overconfidence looks like at the screen

• Skipping the checklist because “I know what I’m doing now.”
• Taking trades that are not on your list, because you trust your gut.
• Holding past your planned exit because you are sure it will keep going.
• Trading more often (Lesson 4).
• Raising your size. This is the most expensive one, so it gets its own section.

Size creep

Size creep is trading bigger than your plan allows, usually a little at a time. One contract becomes two “just for today.” Two becomes three after another good day. Nothing feels dramatic, because each step is small.

Here is the trap. A streak eventually ends, and Lesson 6 showed that a losing run is likely sooner or later. If your size crept up during the winning run, the losing run arrives at your biggest size. A handful of losses at triple size can erase weeks of wins at normal size. You worked out in Local Lesson 8 how much harder it is to climb out of a deep drawdown than to fall into one.

A simple example (made-up numbers)

A trader risks $50 per trade and wins 6 trades in a row, making $600 over those trades. Feeling unstoppable, they raise their risk to $150 per trade. The next 4 trades lose: 4 x $150 = $600. The entire streak is gone in four trades, even though they lost fewer trades than they won. These are made-up figures to show the arithmetic, not real results.

Rules for winning streaks

• Size changes only by your written scaling rules. In Local Lesson 9 you learned to stay small until the process is proven, then step up gradually. A streak is not that proof; a large sample of rule-following trades is.
• Keep running your checklist on every trade, especially when it feels unnecessary.
• Grade trades on rule-following, not on profit (Lesson 5). A winning trade that broke your rules gets marked as a broken rule.
• Write down your reasons before entry (Lesson 8), so you cannot rewrite the story afterward.
• Some traders set a daily profit stop as well as a loss limit, ending the day after a large gain. If you use one, write it into your plan.

Key ideas

• Winning streaks are a small sample, just like losing streaks. They do not prove your method works.
• Overconfidence leads to looser rules and more trading. Research summarized for the SEC links it to worse results.
• Self-attribution bias: credit to yourself for wins, blame on luck for losses.
• Size creep means the next losing run, which is likely sooner or later, arrives at your biggest size.
• Change size only by written scaling rules, and grade every trade on rule-following.