Introducing the Gambler’s Fallacy Indicator

This is a simple indicator of momentum but it can also point to extreme levels in the sense of gambler’s fallacy. The Gambler’s Fallacy Indicator™, or for short GFI, is an oscillator with one free parameter, the length of the period under consideration. This indicator can also be used to pinpoint winning or losing streaks of any length when its value becomes 100 or 0, respectively.

SPY_20140225

The Gambler’s Fallacy Indicator™ for a period of 14 days is shown in the first indicator pane of the above daily SPY chart.  The GFI oscillates between 0 and 100 just like the RSI. Sometimes it indicates overbought and oversold conditions better than the RSI. For example, at the short-term bottom on October 8, 2013 the GFI was at 21.43 while the RSI was at 39.05.

The formula for the indicator is simple and I am sure many have used something similar in the past. I am just claiming the name Gambler’s Fallacy Indicator™ here because math, and especially trivial math, is universal. For a period n, GFI is given by the following formula:

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Charting program: Amibroker
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