Gambler's Fallacy
Also known as: monte carlo fallacy, due-for-a-win bias, fallacy of the maturity of chances
The gambler's fallacy is the mistaken belief that an independent outcome becomes more likely because of a recent streak against it, surfacing in trading as the conviction that a string of losses makes the next trade due for a win.
The fallacy comes from the casino. After ten consecutive reds at the roulette wheel, gamblers bet heavier on black, even though every spin is independent and the odds reset every time. The brain is built to find patterns; when none exist, it invents them.
In trading, the fallacy shows up as size escalation after losses on the theory that the law of averages owes the trader one, revenge re-entries on flimsy setups, and giving up on systems after a normal losing streak that is well inside the system's historical drawdown distribution. The truth is uncomfortable: independent trades remain independent, and a losing streak inside a positive-expectancy system has no informational content about the next trade.
The fix is to size each trade by its own merits, not by the outcome of the previous trade, and to compare any streak to the system's known drawdown distribution before reacting.
Position-size escalation immediately following a losing streak, or system abandonment after a drawdown well inside its modeled distribution.
Surfaces inside Size Discipline and Plan Adherence on the diagnosis.
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