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Gambler's fallacy

The belief that after a run of losses a win is due, or after a run of wins a loss is due, when the outcomes are independent.

Each trade's outcome does not know about the last one. Doubling size after losses because you are due is the martingale strategy, which converts many small losses into one catastrophic one.

The opposite error is recency-bias: assuming the streak will continue. Both come from reading meaning into randomness.

Example: a coin lands heads six times. The chance of heads on the next flip is still 50%. A trader down six in a row who sizes up for the seventh is not more likely to win; he is more likely to be ruined.

Related: recency-bias, sample-size, risk-of-ruin, tilt

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