Gamblers Fallacy, do you have it?
I was listening to a very interesting podcast done by Freakonomics radio
The episode was about gamblers fallacy, which if you haven’t heard of it before is basically the miss held belief that if you toss a coin as heads 5 times in a row then the 6th time surely has to be a tails.
The reality is that each coin toss has an equal opportunity of being either heads or tails aka 50/50
Equally true is that you can toss 10 heads in a row and over short term data points (anything under 1000) then it is likely to be a short term trend or anomaly.
The show was also talking about the bias you give based on the previous experience as to what the next outcome will be.
Overall it was extremely interesting.
As a trader you must have experienced this early on in your career or maybe you still experience it now…
Personally, Ive gone to great lengths to ensure that I follow my strategy and not fall into this fallacy trap and the many faces which it wears.
After 22-yrs you can be sure that there is plenty of data behind my trading to ensure that what I do isn’t a “blip”
One of the realisations you need to have is to understand that trading is not a 50/50 outcome. When you get that it is actually a 33.3% chance of price going up down OR sideways you will start to come closer to the trading realities and of course seeing positive returns on your trading simply because you are getting a handle on realistic expectations.
…and remember each trade has an equal chance of going up down or sideways, wouldnt you be better off using a strategy that has a positive expectancy outcome based around these realities?
Just a thought for you to consider.
Still need a little more help?