Definition
Random sequences are expected to self-correct, as though past streaks influence future odds.
Example
After several consecutive down sessions in a currency pair, a trader becomes convinced that an upward reversal is "due," even though the underlying drivers have not changed. The belief that randomness must self-correct leads to premature or poorly justified positioning.
Cognitive Driver
The mind struggles with true randomness. It expects patterns and balance within small samples. When sequences appear streaky, the brain infers hidden forces that must revert, even when the underlying probability is unchanged.
Market Expression
Traders fade streaks purely because they feel unsustainable. Reversal trades are entered on the assumption that probability has "tilted back," despite no evidence of mean reversion. Small sample runs are mistaken for exhaustion signals.
Trigger Conditions
- Markets with clear streaks or one-directional runs
- Thin liquidity or volatile sessions that exaggerate randomness
- Heavy reliance on visual pattern recognition
- Lack of reference to underlying drivers
- High emotional engagement with P&L swings
Diagnostic Markers
- Language such as "it can't keep going like this" or "it's due to bounce"
- Reversal trades based solely on streak length
- Minimal reference to fundamentals, catalysts, or flows
- Overreliance on small-sample intuition
- Strong conviction in countertrend positions without evidence
Cost Profile
- Entering reversals too early and absorbing avoidable drawdowns
- Mispricing risk by assuming mean reversion in non-reverting regimes
- Overtrading during streaks
- Poor alignment with underlying macro drivers
- Repeated countertrend losses that degrade risk-adjusted returns
Differentiation From Adjacent Biases
- Not recency bias: recency overweight recent events; gambler's fallacy believes sequences must rebalance.
- Not representativeness bias: gambler's fallacy demands pattern symmetry; representativeness demands similarity to prototypes.
- Not confirmation bias: this is misinterpretation of randomness, not selective evidence use.
Corrective Lens
Re-anchor expectations to the underlying process, not the recent sequence. Treat each event as independent unless structural drivers indicate otherwise. Use distributional analysis and long-run probabilities to override the intuitive discomfort caused by streaks.