Do we have hot streaks as a trader? There is some research here from the must read @jonahlehrer that suggests that the belief there are shooting streaks in basketball is not supported by the data. I asked Dr. Jonathan F. Katz of High Performance Associates and who works with traders for his thoughts (see below):

Ah, the age old question, perception or reality? It’s the old toll booth analogy I like to use:.When you whiz by in the ez pass lane with no problem you never take note of this event. However, when you get stuck behind a car whose ez pass doesn’t work, the comment usually runs something like this: “I can’t believe I got stuck in the slow lane again!” Perception or reality??

What makes a hot (or cold) hand in basketball: 4-4, 6-8, 9-13??? All kinds of definitions. How about 5-5 followed by 2-10. What kind of day would you describe you had on the court? It’s more a matter of your own perception of your performance which guides you and impacts your mood and often your behavior.

Trading is even more complex. Unlike baseball where a hit is a hit (although a home run is valued more than a single, not in batting average, but in value to the team), and basketball, where a basket is worth either 2 or 3 points, your “success” rate in trading is measured differently. Do you feel you have a “hot hand” if you have 9 successful trades that make $1 each followed by a single loser of $20? Winning percentage of 90 but net negative $-wise! Or conversely, 9 losing trades of $1 each followed by a $100 winner, do you feel good or bad??? My point is, it is much more important to determine, understand and constructively cope with your perceptions of your own performance, than to determine whether a “hot” or “cold” streak really exists.

Traders should step away from their screens when the impact of losing trades takes them “out of their game” and their ability to make good, clear decisions. On the flip side, traders also need to be aware of over confidence creeping in when they perceive themselves as being on a “winning streak”. This can lead to a loosening up of their process and decision making which can be very risky.

The ultimate goal is to be free of any distractions or beliefs which can get in the way of clearly assessing the value and risk-reward of each trading opportunity before you. Once you start to calculate your batting average, your field-goal percentage or your P+L, you are already distracted and have reduced your ability to perform at your highest level. Of course, all of this is easier said than done!