What is the Gambler's Fallacy in Trading?
Quick Answer: The gambler’s fallacy is the bias that past random outcomes influence future ones—tempting traders to fight trends simply because “it must turn soon.”
Understanding the Gambler's Fallacy
The gambler's fallacy is a cognitive bias where traders believe past random outcomes influence future ones—e.g., expecting EUR/USD to rally just because it has fallen for five straight sessions.
Why It's Dangerous
Forex markets often exhibit streaks driven by macro trends. Assuming mean reversion must occur encourages premature countertrend trades and revenge trading cycles.
Combatting the Bias
Base decisions on valid signals—support zones, fundamental catalysts, or volatility regimes—not streak length. Backtest strategies to quantify probabilities instead of guessing.
Practical Safeguards
Use checklists before taking contrarian trades, ensure stop placement is grounded in structure, and document the rationale in your trading journal to keep emotions accountable.
Avoid Martingale Thinking
The gambler's fallacy often pairs with position doubling. Keep risk per trade fixed—losing streaks rarely mean a reversal is imminent.
Related Terms
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