Lesson 4 of 6 · Trading Psychology
Overconfidence after wins
A hot streak feels like skill. It is often variance.
Five winning trades in a row happens by chance more often than most people expect. The market did not suddenly get easier. Treating a run of wins as proof of skill leads to bigger sizes, worse setups, and looser rules.
Rules protect you from your own streak.
In this illustrative chart, the NO RULES curve shows what happens when a winning streak leads to oversized positions: one loss at 3x normal size gives back several wins at once. The WITH RULES curve climbs steadily because position size stays constant through both winning and losing stretches.
This one is an animated diagram in the app. See it in Vero.
What happens during a hot streak.
Traders take entries they would normally skip because they feel in the zone. They hold past target. They add to winners beyond their planned size. This works until it does not. The single loss that ends the streak often gives back several wins at once because the position was oversized.
After 6 winning trades you are tempted to double your position size. The risk is:
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B. The streak reflects variance, and a loss at double size is a large setback. Streaks end. A large position timed to the end of a run causes outsized damage. Consistent sizing protects against this.