Overconfidence
Why do traders trust their forecasts more than their actual track record would justify?
In plain words
Overconfidence is the tendency to treat one's own forecasts as more reliable than the evidence supports. In markets it often appears after a run of correct calls, when a trader reads a winning streak as skill rather than as a market that happened to move favourably.
Why it matters
Overconfidence shows up as position sizes that are too large, too many trades, and little margin for being wrong. The danger is that a streak carries no guarantee about the next outcome, so the first bad week can arrive at a size the trader never planned for.
In a real week: BTC, week of 7 May 2018
In the week of 7 May 2018, BTC had been up for each of the 4 prior weeks (+19.17%, +5.17%, +7.21%, +2.57%), with no down weeks among those listed. It then fell -10.16%, closing at 8679.71 with a range of 18.85%. With only 12 weeks of history and volume below its prior 12-week average, the winning streak was too short to carry the weight a trader might place on it.
A common mistake
Treating a short winning streak as proof of a reliable forecast. A handful of correct calls says more about recent market conditions than about the forecaster's skill.