The Hidden Trap of Winning Streaks in Trading – By Dr. David Paul

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Your mother may told you that bad things happen 
in threes. Okay. That’s because life is mostly  

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random. Okay. And, in eight observations, 
you get a cluster of three. In other words,  

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a half times a half times a 
half. So, in a 50% system,  

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the hit rate, that’s one out of two. 
You should be right one out of two.

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You should be wrong. Okay. What’s 
the probability of two bad wins in a  

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row? It’s a half times a half. Okay. Two bad 
wins in a row. That means in the 50% system,  

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every four trades, you have two bad 
zero and two good wins in a row.  

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No. That means that if your hit rate comes 
down towards 50%, and many trend-following  

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traders would sell their granny for a 50% system, 
most trend-following systems are less than 50%.

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That in four trades you’re going 
to have two bad ones in a row. Now,  

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most people will give up after two 
bad wins in a row, but it gets worse.  

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What’s the probability of three 
bad ones in a row? Half times,  

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a half times a half. More! Okay. Which means that 
you get a cluster of three bad ones in a row.

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Every eight trades, you get a cluster of 
four bad ones in a row. Every 16 trades,  

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and you get a cluster of five bad ones in 
a row. Every 32 trades, five bad ones in a  

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row. How good will you be in executing your 
system with precision after five losses in a  

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row? Okay. And that’s the challenge in the 
short-term markets as the head trade comes down.

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Then these ghastly clusters of 
bad luck start. And, of course,  

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a cluster of good luck. You can have a cluster 
of good luck as well. Cluster of good luck,  

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of course, is actually more detrimental to your 
health than a cluster of bad luck, because in  

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a cluster of good luck, you get a little thing 
between your ears here called a pituitary gland.

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Okay. And it pumps all sorts of multi multi Zulu. 
It’s a Zulu medicine. It pumps all sorts of multi  

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into your bloodstream. So, when you leave the 
gym after a good workout, you feel good. Yeah.  

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All right. And similarly, when you have one 
good trade in a row, two good trades in a row,  

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the old pituitary gland gets to work and 
it pumps this stuff into your bloodstream.

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You feel good, you become euphoric. 
And when you become euphoric, the  

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definition of euphoria is invincible. And you 
start to forget about all those position sizing.  

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Only risk half a percent to say, let’s have 
a big bet. When you have a run of good luck.  

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That euphoria takes over. And most people, in 
fact, go bankrupt after a run of good luck.

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Not after a run of bad luck. Because they 
think they’re God and they forget about  

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all those position sizing stuff. And it’s 
happened to me on a few occasions that.