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Believing in “lucky streaks”

👤 Psychology of Trading: believing in "lucky streaks"

 

▪️ Many people are always trying to identify patterns in randomness. The winning streak phenomenon is a trader's belief that he cannot lose dramatically after a series of winning trades. The trader does not recognize transactions as independent, preferring to believe that the "winning streak" will continue, however, it is important to understand that markets depend on many external circumstances, and not only on individual human abilities.

 

▪️ In 1985, famous behavioral scientists Thomas Gilovich, Robert Vallone and Amos Tversky published their study "the lucky streak in basketball." The study was intended to prove that the people are wrong, making the assumption that players have more chances of another successful hit in the basket after a series of successful hits. Scientists have claimed that people misinterpret randomness and therefore draw incorrect conclusions. As with the coin toss, people believe that the chances of tails increases after a toss lands as heads.

▪️ When trading, those who are under the influence of the hot streak fallacy "expect to be rewarded for trading decisions solely on the basis that their previous trades were successful. They believe that their chances of making a profit are higher. This can cause several other trading biases, including: confirmation bias (where the investor only believes information that confirms his point of view) and the illusion of control (where the person believes that he or she is in control of the situation and can even manage it). The more trades a trader has in his winning streak, the less likely he is to lose. But this is not the case, the streak must end somewhere, and if a trader does not take this into account, he risks losing his deposit in the trade. 

 

▪️ In financial markets, the psychological “streak of luck” phenomenon also occurs when traders try to delegate their investment decisions to professional fund managers who have had successful track records in the belief that they can continue to perform well.

 

▪️ Not every trade you make will be a winning one, no matter how well you have traded in the past. Analyze every trade, do not make hasty decisions and do not make logical conclusions based solely on successful past experiences. 

 

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