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What is gambler’s fallacy in trading?

The gambler’s fallacy is the belief that past outcomes influence future probabilities. A trader may think, “I lost five trades in a row, so the next one must win.” In reality, each trade is independent, and probabilities don’t reset based on streaks. This fallacy often leads to oversized risk after losing streaks, worsening drawdowns. Traders should avoid emotional reasoning and stick to statistical expectancy. Recognizing that probabilities play out over long series, not individual trades, helps counter this bias.