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.

I agree with you as large forces take sides. But my real point I think I need to make clearer is that the average daytrader will be lead to make a choice. That person will be right because he joined the right group after the fact.
But at the same time that group may decide they were wrong and that average trader will get run over by the reversal because he knows to late.
This is why he must be faster at money management than making trading choices. His choices are always late so his speed to stop losses are his buffer to survive.

So if you reverse that logic do you think that the larger and more informed traders can be more relaxed with their money management and stops than the smaller traders can be?

No one can be relaxed at anytime when it comes to money mangement or anything at risk, due to the other strong opposing forces.

Ask Mike Tyson when he came to fight resting on his winnings and was was beaten up and his crew only had a rubber glove with ice to treat him.
You always do your best,the game never changes.

I found this quote on another forum and i thing is appropriate for this topic "One does not plan and then try to make circumstances fit those plans. One tries to make plans fit the circumstances"

I agree with both of the comments and/or quotes. No matter what you plan you can't "make" the day happen so whatever will happen you have to have adaptive plans for the circumstances.

Putting that into practise is way more difficult. What I used to find was that I would say "If the ES rises more than 5 points before 10am then I will .... and if it drops more than 5 points before 10am then I will ...."

What I found sometimes though was that it would drop 20 points before 10am (this is rare) and then I would be sitting there saying "hey, it's past my 5 point limit am I going to do X?" but I would be pretty shaken by then (even though I hadn't taken a trade) because of the radical move in that time frame.

In regard to planning for what may happen. What I have have learned over the years is you always train to learn defense first,you study all the possible moves that can be made against you, then develop a counter move that allows you to survive. You are preparing a defense against the more predictable stuctured opponent who works under controls that limit them. However your worst opponent is the unsupervised who can inject an element of surprise.
Or when a rational man can turn irrational is another way to look at it.
So learn first to always react with speed and percision when your plans move against you. Train your reaction till it becomes a reflexive move.
" He who hesitates dies."

That sounds like a very martial arts / Eastern / Zen style of thinking. Is this where you are going with this?

quote:

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Originally posted by inventor

..."One does not plan and then try to make circumstances fit those plans. One tries to make plans fit the circumstances"

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This is an excellent quote and one to live by in daytrading.

I agree with shenhill. Before you attack you must learn how to defend. This is important because if you attack and discover that your oponent is bigger or stronger than you thought you need to be able to defend to survive.

This is starting to sound like The Art of War. Have you read this book?

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.