Atlas of Cognitive Biases #2 · Randomness and probability. A winning streak isn't proof yet
What it looks like in trading
increasing size after a few winning trades in a row
“it's working today, so I'm taking everything”
copying a trader who had a great month
An example from a session
Three good decisions in the morning. The trader feels they're “reading the market” better than usual and breaks their own risk rules in the afternoon. The afternoon market has different liquidity and a different rhythm (MYM by the numbers #1 in the Order flow encyclopedia space), and a streak by itself doesn't change the odds.
What the research says
Gilovich, Vallone and Tversky (1985) found no “hot hand” in basketball shooting. Miller and Sanjurjo (2018), however, showed that their method had a statistical flaw and that a small streak effect may exist. The takeaway for traders: streaks can be real, but people overrate them far more than the data justifies.
The flip side of the gambler's fallacy: the belief that after a series of successes another success is more likely, because “I'm on a roll”.
How does the hot hand fallacy show up in trading?
Typical signs: increasing size after a few winning trades in a row; “it's working today, so I'm taking everything”; copying a trader who had a great month.
Educational content, not psychological advice or an investment recommendation.