The Gambler's Fallacy

Has anybody applied The Gambler's Fallacy to trading?

Briefly what this says is "The gambler's fallacy is a logical fallacy involving the mistaken belief that past events will affect future events when dealing with random activities..." etc.

The idea is that the dice or roulette wheel does not have a memory. So if red came up 10 times in a row on the roulette table then the chance of it coming up red the next time is not affected by the previous results.

I am interested to know how this applies to trading.

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Originally posted by inventor

the second paragraph you are correct if you are trading concentrate at your trade 100% as far as the 1.75 points move it has been stated by some one in a book and has been observed by me that in a upside move there is a retracesmant of 1.75 points 80% of the time so if your on a long position and it retraces 2 points you must pull the trigger less then 2 then there is still up side move.... this appry to ES so far.

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That is interesting. I have never heard of the 1.75 point move 80% of the time before. Do you remember which book it was in? Also, how are you distracted?

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Originally posted by elite trader

...I find that I end up reading emails or doing things on the internet when in fact I should be watching the trade and the charts.

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elite trader: I find that I do the same thing. You put on a trade and then the market just stalls. It moves 1 tick this way and that but just stays at your entry price. Then you see a little note or envelope pop-up in the bottom right hand corner of your screen and you know that you have an email. So you open the email and that has a link in it to a trading article and so you follow the link. That leads to another link and another page and another web site and before you know it you hear a beep and your trade has been stopped out and it's one hour later...

Okay, I'm exaggerating a little bit about the time but you get the picture. Not sure if this is what inventor was also talking about?

That is exactly what I do.

Yes Yes…… that is exactly the distraction. Three years ago I had a three screen set up and I can put the reading on one and still have the platform visible on the other two but that didn’t work because I don’t use stops.

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Originally posted by inventor

Yes Yes…… that is exactly the distraction. Three years ago I had a three screen set up and I can put the reading on one and still have the platform visible on the other two but that didn’t work because I don’t use stops.

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If that did not work then did you find something that does work to stop the distraction? I found that turning off the email did not help because then I would need to switch it on later to do something and so the problem would come back.

If you do not use stops then how do you stop-out a position? Do you watch the trade and then hit a market order to close?

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Originally posted by elite trader

quote:

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Originally posted by inventor

Yes Yes…… that is exactly the distraction. Three years ago I had a three screen set up and I can put the reading on one and still have the platform visible on the other two but that didn’t work because I don’t use stops.

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If that did not work then did you find something that does work to stop the distraction? I found that turning off the email did not help because then I would need to switch it on later to do something and so the problem would come back.

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well!! I have a strategy that I'm working on very hard, I get to my terminal at 5.30 and I don't check my email till 8.30 by then my trading is done.....

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If you do not use stops then how do you stop-out a position? Do you watch the trade and then hit a market order to close?

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I'm in a trade no longer then 1 min if that, the only time I'm in longer is during lull time that's what I call it and that is very rarely and if that happens I get out. I always use limit never have time to chenge to market.

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Originally posted by inventor

I'm in a trade no longer then 1 min if that, the only time I'm in longer is during lull time that's what I call it and that is very rarely and if that happens I get out. I always use limit never have time to chenge to market.

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You are in a trade no longer than 1 minute!! That's not even scalping! That's high-speed-rapid-trade-micro-scalping. I have never heard of anybody who's trades are that short. Your targets must be very small because the market cannot move far in that time? Do you have a fixed number of points/ticks that you target on each trade or does it vary?

Have you seeing the market lately it is so volatile, 5 points fluctuation on ES is nothing so I apply the 1.75 rule and with the right amount of contracts and 1 point several times well? You do the math.

I agree that the market is volatile at the moment but 1 point profits mean that a large percentage of the profit also goes in commission. I am guessing that the 1.75 rule means that you get stopped at a 2 point loss so your win/loss ratio is high if you are targetting 1 point per trade.

I am just doing the math on the fly but if you do 10 trades and 7 are winners and 3 are losers then you have 7 points gain and 6 points loss so you have 1 point gross profit and 10 trades worth of commission. If each contract costs $5 then you have $50 in commission for each contract and $50 in profit so you are at break even with a 70/30 win/loss ratio.

This means that this strategy needs to be better than 70% winners. That is very tuff IMHO!! How many days in a trading month do you come out ahead with winners?

$5.00?? no $2.25 total and with the right amount of contracts two hits a day that's all you need.

UrbanSound, you and I are saying the same thing. Simply using price bars you cannot predict the next bar. The predictability of future bars is in the patterns. Such patterns include S/R, Fibs and such. It is the formation that gives predictive value because from that you are able to see what other traders are thinking and hoping for.