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Have you become bearish on the market or bought put options simply because it has risen for more than 5-6 consecutive days?

This phenomenon is known as the gambler's fallacy. Consider flipping a coin, after getting heads five times in a row, you might assume that the next flip is more likely to result in tails. However, that's not true. Each coin flip is independent of the previous one, so the chance of landing on heads or tails is always 50%.

The record for the most consecutive coin tosses with the same outcome is 8. The probability of the event is 0.39%.

Similarly, the record for the stock market ending in the green continuously is 27 days by the Japanese Nikkei 225 index in 1987, but the probability of this happening is almost 0.

These events are highly unlikely but still possible.

Here are the most common examples of the gambler's fallacy in trading:

1. Buying a stock after it has experienced a significant price increase.

2. Selling a stock after it has experienced a significant price decrease.

3. Buying a stock that has been heavily beaten down.

4. Selling a stock that has been performing well.

All of these behaviors often start with the thought of how much further a stock can rise or fall.

In the future, avoid falling into the trap of the gambler's fallacy simply because a stock has been moving consistently in one direction.