Subscribe now and watch my free trend following VIDEO.

Gambler’s Fallacy

A good reminder (PDF) worth reading. An excerpt:

“Imagine an unbiased coin is flipped three times, and each time the coin lands on heads. If you had to bet $1000 on the next toss, what side would you choose? Heads, tails or no preference? Anyone calling tails is suffering from the gambler’s fallacy – a belief randomness mean reverts. Of course, it doesn’t. The coin has no memory, on each flip it is just as likely to come up heads or tails. How does this relate to the equity market? Well, year on year returns in equities are essentially a random process, just like the coin toss. So saying markets can’t go down four years in a row is just like calling tails in the coin tossing example…”

I do know the article was written in 2003, but does that make a difference to the author’s overall lesson?

Learn to be a trend following trader.
Sign up free today.