Gambler's fallacy
Why does expecting a reversal simply because a losing or winning streak has run long often lead traders astray?
In plain words
The gambler's fallacy is the belief that an outcome becomes more likely because it has appeared several times in a row. In markets, traders read a string of down weeks as evidence that an up week is now due, even though each period's outcome is not forced to correct the previous one.
Why it matters
Positions built on an expected reversal carry timing risk that the data does not support. Prices can trend for far longer than intuition allows, and a streak tells you about the sequence that already happened, not about the probability of the next move.
In a real week: ETH, week of 29 July 2024
In the week of 29 July 2024, ETH fell 17.77%, from an open of 3270.16 to a close of 2688.92, with its worst day on 4 August at -7.4% and a return percentile of 6.0 against 337 weeks of history. The prior four weeks were mixed at -14.75%, 10.72%, 8.96% and -7.52% — two down, two up — so the premise of a long streak was not present, yet the fall continued regardless.
A common mistake
Confusing the fallacy with mean reversion. Mean reversion is a testable claim about prices drifting towards a long-run level; counting streak lengths and demanding a bounce is not evidence of either.