Avoiding the Gambler's Fallacy: The importance of having a process in Forex Trading

Jul 24, 2023

Let's talk about the Gambler's Fallacy and how it can impact us as traders, not in the least because trading is often compared to gambling by outsiders. The Gambler's Fallacy refers to the mistaken belief that if something happens more frequently than normal, it will happen less frequently in the future or vice versa. In other words, it's more or less the idea that past performance is a guarantee for future results.


As forex traders, it's crucial to avoid the Gambler's Fallacy by considering the full range of information we have and never relying solely on past performance, and not getting over-confident because of past performance either. This is where trading education, trading tools, and money management come into play. By implementing a reliable process, traders achieve consistent profitability.


The data everyone knows about, even though no one knows the exact number (and what it means)

We have all seen different numbers floating around as to which percentage of retail traders is actually profitable. And we have seen these numbers, but just like most other people, we don't which numbers are correct. And to be honest, we don't really care about the exact numbers.
The fact that more retail traders are not profitable than are profitable, will not come as a shock to anyone who has been into a trading for a bit. However, those who receive formal trading education are more likely to be profitable, simply because it gives them a structure and a process that they can repeat time and again. Knowing why a trade setup has a high probability to play out in your favor, is fully based on your understanding of what is happening and for that a trader has to be educated.


Using tools

Furthermore, using trading tools can significantly improve trading performance. Traders who use technical analysis tools such as trend lines and moving averages may achieved a higher success rate than those who did not use any tools. However, this doesn't mean you have to start plastering your charts with trend lines and moving averages now. More often it just means that traders who are more experienced, know how to better utilize these tools. They have had the education and use these tools as actual tools instead of leading indicators to base their trades on.


Money management

Effective money management is also key to consistent profitability. This is another no brainer. You'd be surprised to see how many beginning traders don't take this as seriously as they should. Proper position sizing (by using tools like Stinu) can help to correctly manage risk and thus improve overall trading performance. Furthermore, having a set of money management rules you can use in your trading process makes a night and day difference, not just in your performance, but also in how much more peacefully you experience the trading itself.


Human psychology

It's very important to note that even though these statistics demonstrate the effectiveness of a reliable trading process, they are not guarantees of future results (not for beginners or even experienced traders). The forex market is constantly changing, and a trader must adapt to new market conditions to remain profitable. This requires ongoing education, practice, and a willingness to adjust strategies as needed. It also depends highly on the kind of education a trader is basing their trades on. At Urban Forex we rely fully on the focus of the WHY and understanding the story of what is happening. This is all based on human psychology and is not just usable in a changing market, but is also much more future proof, because trading - even if bots do it - is always based on human psychology.


Rotating back to the Gambler's Fallacy

As per the Gambler's Fallacy, we can not rely on our own past performance, and it's not just the markets that are too fluid for that, but also our own human character. But we can rely on our process, which should be rigid and an ever work in progress to improve, because this process we can repeat day after day.

In conclusion, avoiding the Gambler's Fallacy and implementing a reliable trading process can significantly improve forex trading performance. By investing in trading education, using trading tools, and practicing effective money management, many traders are consistent profitability over time. Remember, past performance is not a guarantee of future results, so it's crucial to stay informed and adapt to changing market conditions.


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