The Most Dangerous Trade of Your Year

Become more humble as the market goes your way

Everyone braces for the drawdown yet nobody braces for the run.

I’ve written a lot on here about the down-cycle: drawdowns, ruts, fear, revenge, the whole catalogue of ways a losing stretch can rip you apart. And it should get the attention, because losing hurts. But if I’m being honest about where I’ve done the most damage to my own book over a decade of managing real money, it wasn’t in the holes. A lot of the time it was at the highs. The worst trades of my career didn’t come when I was scared and down. They came when I was up, loose, and absolutely certain I’d figured it all out.

This is the post nobody writes, because it doesn’t feel like it needs writing. When you’re winning, the last thing you want is some bloke telling you to be careful. But that’s probably the moment you need to hear it, and exactly the moment you won’t. So let’s talk about the thing that actually ends most good years: not the losing, but the winning that came right before it.

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A losing streak comes with built-in brakes. The pain itself is a brake, as is loss aversion. Fear slows your hand, makes you cut size, hesitate, and eventually makes you step away from the screen entirely. Your nervous system is screaming at you to stop, and your account balance is physically shrinking, which caps how much more damage you can do. A drawdown, left alone, tends to decelerate. The market and your own fear conspire to apply the handbrake.

A winning streak has none of that. There is no internal mechanism that fires when you've been right too many times in a row. Euphoria does not self-correct. Confidence does not throttle itself. The dopamine doesn't tap you on the shoulder at the right moment and say that's enough now. You just accelerate, and it feels fantastic the entire way, right up until the wall. You are speeding up while smiling.

That's why being up is more dangerous than being down and why I decided to write this post. Down, the market is fighting you, and so are your own emotions, and between them, they slow you down. On the up, everything is pushing you to go faster. Your P&L, your mood, your brain chemistry, you name it. And there's nothing in the system telling you to ease off. The handbrake during a winning streak has to be installed manually. It is the only one you have to build yourself, and almost nobody does.

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If you keep a journal, and I’ve banged on enough about why you should, go back and look at the trade you put on immediately after your single best trade of the year.

I’d put money on it being one of your worst.

There’s a window that opens right after a big win, and it’s lethal. You’ve just been paid, handsomely, for being right. The afterglow is real, and it’s chemical. I went deep on dopamine in Mastering Your Mind, so I won’t repeat it, but the short version is that your brain has just been flooded with reward, and it wants to do that again immediately. So you go looking for the next trade. Not because the setup is there. Because the feeling is there, and you want more of it.

And in that window, your guard is down in three specific ways. Your sizing is loose because the last big bet worked, and your reference point for “normal” has just been dragged upward. Your standards are loose because you feel like you can’t miss. And your process is loose, because winning makes the checklist feel like a formality. Why run the full pre-trade routine when you’re clearly seeing the ball this well?

That’s the post-win trade. Bigger than it should be, on a worse idea than usual, with half the diligence. It is the single most reliable way I know to give back a chunk of a good run, and I’ve done it more times than I’d like to admit, as have many. The cruel part is that the better the win, the worse the follow-up tends to be, because the size of the win is exactly what determines how loose you’ve gone.

The rule I’ve landed on is simple and I try to treat it as sacred, which is that the trade after a big win gets less size, not more, and gets the full checklist, not a waiver. If anything, the moment you most feel entitled to press is the moment to do the complete opposite.

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There’s a phrase that floats around when people are up, and I suggest you delete it from your vocabulary - playing with the house’s money.

You’ll hear it, you’ll think it. “I’m up 30% on the year, so I can afford to swing a bit.” It is one of the most expensive sentences in trading, and it’s a textbook case of what behavioural folks call mental accounting. The money in your account is your money. It doesn’t matter whether it arrived last week or last year. The moment it’s in your book, it’s your capital, and treating last month’s gains as casino chips is precisely how you hand them back.

The market doesn’t know nor care that you’re up. There’s no asterisk on a loss that says it doesn’t count, was made with profits. A 10% hit from a high is a 10% hit, and it’s coming out of your money. The instant you start mentally ring-fencing some portion of your equity as expendable house chips, you’ve given yourself permission to be reckless with it. And you will be.

I keep one number in my head and it’s the only one that matters: the account, as it is, today. Not the high. Not where it was. What I’m actually holding, right now, which I am responsible for protecting. There is no house. When it comes to markets, we are all the house, and the house’s whole edge is that it never gets emotional about a winning night.

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I’d say confidently that the silent killer is the sizing creep. Nobody wakes up and consciously decides to double their risk. That’s not how it happens. It happens by creep.

This is the thing I want you to really think about, because it’s the mechanism that does the most quiet damage during a good run. I wrote in the Size Matters post that size is more important than entry, and that too big is defined by your own behaviour rather than a percentage. But there’s a version of “too big” that’s even sneakier than the one I described there, and it only shows up when you’re winning.

During a streak, your size ratchets up imperceptibly. You add a little because the last one worked. Your new “normal” is slightly bigger than your old normal, and it felt fine, so the next normal is bigger again. Each individual step is tiny, and each one was vindicated by a win, so there’s no alarm. No single decision ever felt reckless. But string ten of those together, and your “core” size is now something you’d have called aggressive two months ago, and you never once made the conscious choice to get there. The streak made it for you.

Then the regime shifts, or vol expands, or one trade simply doesn’t work, and you discover you’re carrying three times the risk you think you are, with none of the emotional preparation that comes from deciding to be that big.

The fix is mechanical. Anchor to a fixed base size and recompute it from your rules, not from your inflated equity. Every so often during a good run, ask yourself flat out: “Is my current working size the one I’d have chosen on a cold morning with no recent wins behind me?” If the honest answer is no, you’ve got creep, and you trim back to your normal size, whether it stings or not.

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I think another dangerous thing about winning streaks is that they have the ability to rewrite who you think you are. When you’re winning, you start to believe the winning is all skill, which is normal. It’s a very natural and very human error. You did your analysis, put the trades on, and they worked, so clearly it’s all you. What gets quietly written out of the equation is, one, the regime, and two, luck. Most strong runs tend to happen because the market handed you an environment that suited your style. The trend was clean, vol behaved, and your bread and butter set-up was printing because these conditions were ripe for it. Sure, you were good, but you were also fed.

The trap here is that the streak convinces you that the regime is permanent. It convinces you that the way the market is behaving right now is normal and just the way markets are. And that your recent results are the baseline you should expect going forward. Recency bias is dangerous, and when the regime finally turns (oh, and it always does) you keep running the playbook that worked in the old regime straight into the new one, sizing your positions up because it’s been working right up until it very much isn’t.

I have lived this one properly. I had a stretch a while back where a particular kind of environment suited me down to the ground, and for a good while, I couldn’t put a foot wrong. By the end of it, I’d half convinced myself I’d cracked the code, but what I had actually done was get very good at trading that specific regime, and I mistook the regime’s gift for my own genius. And of course, it finally flipped and caught me out, giving back a good chunk before I was willing to admit the world had changed, and I hadn’t. The lesson here for me was that I’d stopped being able to tell the difference between my edge and my luck, and a streak is precisely the thing that erases that line.

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When I wrote the Size Matters post, I wanted to give you the behavioural cues to look for when your size is wrong. Here’s the equivalent checklist for when you’re getting high on your own supply.

1. You are checking your PnL because it’s fun

   • When you’re down you check out of fear

   • When you’re up you check for the dopamine hit

     • Both mean the number has way too much power over you

2. You’re telling people - be that your partner, colleague or anyone that’ll listen

3. You’ve stopped journaling

4. You’re bored with your normal setups and find yourself reaching for spicier trades just for the stimulation

5. Lifestyle creep

6. You’ve rounded your size up

If three or more are true, you’re at the most fragile point of the cycle, and the smart move is to de-risk into your own strength.

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In my Drawdown Psychology post, I tried to cover how a drawdown can ruin your life outside the screen - losing sleep, irritability, and so forth. What nobody will tell you is that a winning streak can do its own kind of damage but because you feel good, you never see it as a problem.

You actually sleep worse during a great run, not better, because you’re wired and excited and your brain won’t switch off thinking about the next idea. You start spending gains you haven’t realised. Your ego inflates, and the people around you notice before you do. And the higher the high, the harder the comedown when it’s over because you’ve let your sense of self get tangled up in the equity curve.

So, as a follow-up to my Drawdown Psychology post, protect your life from trading in both directions. A great month shouldn’t turn you into a different person any more than a terrible one should. If a win is making you sleep badly and spend stupidly and quite frankly act like a prat, the win is also costing you. You just can’t feel it yet.

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So what to do if you’re winning… A good start is to take some off, mechanically. As I said in Size Matters, some of the most successful guys I know will systematically trim into strength so that when the inevitable reversal comes, they’re already smaller. Reduce size after a run, not just after a loss. Cutting when you feel invincible is the hardest thing to do, yet the most valuable and one of the things that separates people who keep their gains from those who round-trip them.

Another thing to do is to keep journaling the winners. For those who journal, it’s common to stop writing trades down because winners feel self-explanatory when they’re not. If you only autopsy losers, you bank every bad habit that got rewarded by luck, and you’ll repeat it at size next time. So write down your gains, and be honest about which winners came from good process and which were just coin flips that landed your way.

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In Size Matters, I made the point that the penalty for overestimating your edge is roughly twice as severe as the penalty for underestimating it. Here’s why that’s the whole ballgame for this post: a winning streak’s single most reliable effect is to make you overestimate your edge. You have seen your strategy win over and over again, so of course, you now think it’s better than it is. Which means a hot streak doesn’t just tempt you to bet more, it actively pushes you towards the exact error that the maths says is the expensive one.

The most rigorous sizing framework ever built and your own nervous system agree on the same advice, and it’s the same advice when you’re up as when you’re down - trade smaller than you think. You just don’t want to hear it when you’re winning.

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That is it for me today… I’ll leave you with the line I’d tattoo on every trader who’s having the best month of their life - the drawdown you’re going to spend next quarter climbing out of is almost certainly being seeded right now, at the high, while you feel untouchable. Good runs don’t end because the market turns. They end because you changed.

Happy trading,

Fed

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Further reading on psychology…