Flip a coin. Choose heads or tails. Your odds of winning against an opponent are 50:50. But what if the coin lands on heads three times in a row? Does it change our point of view? For some, the idea that it will land on heads a fourth time seems unlikely, so we choose tails – and this is a classic example of gambler’s fallacy. Similarly, if a family has three children who are all girls, we might think the next one is sure to be a boy – but we are mistaken.

The truth is that the past does not help us predict the future in this case. No matter what has happened on the last three occasions, the odds of the coin landing on heads or tails, or of a baby being a boy or girl remain 50:50. Just as the past will not help us predict the future in these scenarios, nor will it help a day trader make good trades.

In fact, for day traders, falling victim to gambler’s fallacy is a fatal mistake. It can see you blow your entire bankroll on what is essentially little more than superstition. If selling a particular stock has always gone well for us in the past, or if we were burned badly by a particular sale, gambler’s fallacy can influence our decision on whether to buy and sell that stock again in the future. Rather than work with the data and information available to us, we allow our feelings from the past to cloud our judgement.

A similar problem is Hot Hand Fallay, where we believe we are on a ‘winning streak’ and start to make poor decisions based on this rather than looking at the data in front of us.

Day traders survive and thrive based on fast, impeccable decision-making. For decisions to be consistently profitable, they need to be made based on analytics. Risking a significant portion of your bankroll on a trade that is made based on presumptions about feelings from the past is naïve and dangerous. Forecasts and judgement calls must invariably be made using all the available information, without succumbing to the somewhat emotional nature of gambler’s fallacy.

It can be easy to get sucked into the idea that patterns exist where they don’t – it’s part of the nature of human psychology to look for patterns and rhythms. As a day trader, it’s essential to guard against this. If you feel yourself leaning towards this way of thinking, take a short break. If you are focused on something that happened in the past, take a few minutes to understand why and then let the past go. Analyze the data in front of you carefully and use it to make the best decision possible. If necessary, consult with a colleague and get a second opinion.

As the name suggests, when we fall into this trap, we are no longer traders – we are simply gamblers going all-in on a gut feeling and hoping for the best. No trader can hope to remain consistently profitable while operating in this manner. A short-term streak of good luck will inevitably be wiped out over time leaving your bankroll eviscerated.

Take a step back if you feel this happening – a short break now could save you a lot of money in the long term. Examine your motives and your feelings, and make sure you’re making calls based on the right information before you get back on the trading floor.