Everything that you can do wrong as a trader is going to be the result of what you’re afraid of and the effects that fear has on your perception of market information.
It’s not just the recent things outside of ourselves like the market or our trade setups that CAN AFFECT our trading performance. If we are trading well and string a few successful trades in a row or have an Big gain, we run the risk of allowing this recent experience to influence our next trading actions.
“Your ability to create consistent results as a trader is all about what you expect. When you change your expectations to be consistent with the way the market environment exists the fear will go away.”
The tendency is to think we are on a hot streak or somehow our skills and abilities have rapidly improved or we are just reading the market better than others. This puts us at risk of committing several unforced trading errors such as increasing position size, overtrading, or entering marginally qualified trades.
Traders after Winning Streak tend to lower their guard because they feel good—can reinforce and amplify recent positive performance. Over weighting recent performance can influence our current attitude and behavior, often leading us to act outside the bounds of our trading plan or, more generally, act outside the bounds of rational trading.
Your beliefs are your own self-fulfilling prophecies.
And, it’s not just winning performances that can get overweighed; traders just as readily overweight poor performances, too. Recent poor performance can lead a trader to withdraw from the market in order to avoid the expectation of further poor performance, or they may do the opposite and double down with increased position size or take on additional trades in an eff ort to recoup what had been lost.
Either way, the important point is that recent events or actions are judged as overly important and directly influence our next actions. This often leads to erratic trading behavior and increases the odds of committing unforced trading errors and producing unnecessary losses.