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In our previous post about gaps, we looked at market behavior around opening gaps and what would generally happen during that same trading session. But nothing spectacular came out, an opening-gap meant nothing for further price action that day. Also, the average size of an opening gap turned out to be a few factors smaller than average daily volatility, so those margins were easily absorbed regardless of whether there was an opening gap or not.
Now suppose the opening-gap does not get closed during the same trading day. How does affect the market in the next couple of days? Does price gravitate back towards such a gap, as if it wants to pull in price or doesn't it have any significant meaning as we saw in the opening-gaps analysis? Let's dive in.
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The hot hand fallacy in trading is a cognitive bias that occurs when traders believe that a winning streak will continue, even though the probability of success remains unchanged. In other words, traders may think that because they have experienced a series of successful trades, they are more likely to continue to make successful trades in the future.
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Everybody knows this feeling and also knows it is a false feeling. You're in a casino, and the roulette hits red. Then again and again. After three, four maybe five times red in a row, you start to think it's time for the roulette to hit black. Now, in this simple case, you know that's not true.