Hot-hand belief
Why do traders expect a rising market to keep rising once it has risen for several weeks?
In plain words
The hot-hand belief is the intuition that a recent streak of gains predicts further gains. Strictly speaking, past performance carries no guarantee about the next move, but a run of good weeks is often read as momentum rather than as luck already banked.
Why it matters
It shapes how much risk traders take. A market that keeps rising also keeps getting more expensive relative to its recent history, so the position taken on a streak tends to be largest just before the streak ends. Being able to tell belief from evidence matters for anyone sizing a trade.
In a real week: BTC, week of 2 November 2020
BTC rose in the four weeks before 2 November 2020, by 6.59%, 1.18%, 13.26% and 5.62%, with no down weeks among them. In the week of 2 November it added another 12.45%, its return ranking in the 89th percentile of 142 weeks of history, closing 2.45% below its 52-week high with volume 2.19 times its prior 12-week average. A reader who saw only the streak would have expected it to run; the data show how unusual that streak already was.
A common mistake
Treating a long run of gains as evidence that the next week will also be positive. A streak is a description of the past, not a forecast.