There is a fun WSJ piece out: “The Secret to Success in Bowling: Getting Hot.”
Basically two guys from Yale discovered that, while “the hot hand” in basketball and other sports is a myth, in bowling it’s the real deal.
In basketball, for example, a shooter’s “hot streak” really just represents fluctuations around the long-term statistical average.
In basketball, the better your field goal percentage overall, the more likely you are to sink X shots in a row simply as a matter of chance.
For NBA players, “hotness” does not have a documented mathematical tendency to persist. A string of threes early in the game, does not increase the likelihood of sinking them later in the game.
In bowling, though, strikes DO tend to beget more strikes — and the numbers bear this out. Yale number crunchers Gur Yaari and Gil David confirmed this with a massive sample size: More than 40,000 bowling events between 2002 and 2011.
Bowling champ Walter Ray Williams has a theory as to why the streaks persist:
Williams, who is nicknamed “Deadeye” for his peerless accuracy, says it’s all about getting a read on the lane. Every lane reacts differently due to varying amounts of oil that determines how much each shot will skid and hook. Find that line to the pocket early, he says, and you can pile up strikes all game.
One could argue, then, that the connecting factor in bowling and trading is the presence of exploitable conditions.
When you find “that line to the pocket,” as Williams puts it, you can get into a (literal) groove that increases the odds of hitting strike after strike.
The WSJ article title is wrong, of course. The secret to bowling success is not “getting hot,” but rather finding the line to the pocket, i.e. figuring out the strategy that works in the first place.
The trading connection is that, analogous to oil patterns in a bowling lane, certain market environments favor certain types of trading methodologies and approaches.
Sometimes trend conditions persist. At other times, reversion to the mean conditions persist. While market conditions change, like the seasons, a current set of conditions can stick around for an extended period of time.
For discretionary traders, a winning streak can also relate to being in synch with ‘the market script’. If you are reading the signs correctly, odds increase that the narrative will continue to unfold as you anticipate.
If a strategy or trading methodology is ‘hot,’ in other words, there is a greater than random chance that wins could persist, for the same reason that streaks in bowling persist.
(In an idle side note relating to this, I’ve often wondered to what degree the first generation of commodity futures traders benefited from a powerful inflation bias that lasted for years and years… just as daytraders made killings for an extended window of time in the dotcom boom… cash rich private equity guys killed it in the liquidity boom years of 2004-2007… and so on.)
Bottom line: With trading, as with bowling, sometimes you’ve got the lane pegged, and sometimes you don’t. When you don’t, conserve your capital and lay low… but when you do, exploit it!
This is not an argument for getting cocky or sloppy after a string of good trades, but rather a simple explanatory train of thought as to the mechanics of that old trading wisdom: “When trading poorly, lower your exposure; increase exposure when trading well” (Paul Tudor Jones paraphrase).
There are many ways to do this, as we explore in the MT Driver’s Manual (a series of articles that will resume shortly!). If you can forgive the metaphor switch, it’s critical to recognize when conditions are optimal… when to press hard on the accelerator… and when to use the brakes.
(Final disclaimer: None of us can be good at everything — I can’t bowl worth a crap.)