The gambler's fallacy after a losing streak

[Amanhasnoname]

Five losses in a row, and a feeling creeps in that a win is due. The market doesn't work like that.

Each trade is a draw from a distribution. Past results don't change the probability of the next, assuming conditions remain the same. A strategy with a 55 percent win rate still has a 55 percent chance on the sixth trade, after five losses.

The fallacy leads to larger size, looser criteria or doubling down to recover. Those behaviours turn a normal losing run into a disaster.

The reverse also happens. After a series of wins, some feel that a loss must be coming and exit early or skip signals.

What a streak can legitimately suggest is that something changed: volatility, spread, correlations or the broker's execution. Checking those is sensible. Assuming that luck will turn is not.

Knowing the longest expected losing streak, which can be estimated from the win rate, helps set expectations. A 55 percent system produces runs of six or seven losses regularly.

What is the longest losing streak your system has produced, and how did you react?