The probability of getting heads in a single coin toss is 50% (or 0.5). Interestingly, the outcome of one toss does not affect the outcome of subsequent tosses.

So, if you’ve already gotten heads 8 times in 9 tosses, the probability of getting heads on the 10th toss is still 50% (0.5), because each toss is independent of the others. The past outcomes do not influence the future outcomes in this case.

In probability, the law of large numbers states that as you perform more and more trials (in this case, coin tosses), the observed probability will converge to the theoretical probability. In the long run, if you were to continue tossing the coin, you would expect to get heads approximately 50% of the time.

So.. How Does This Apply To Your Trading?

The Nasdaq has gone up 8 days in a row. What is the probability it will go up today again?

The probability of getting heads 9 tosses in a row with a coin (or 9 positive days on the Nasdaq) can be calculated by raising the probability of getting heads (0.5) to the power of 9 (since each toss is independent).

So, the probability of getting heads 9 times in a row is:

0.5^9 = 0.001953125

This is approximately 0.1953%, or about 1 in 512 chances of getting heads 9 times in a row when you toss a fair coin. It’s a relatively rare event because the probability of getting the same outcome multiple times in a row in a random sequence decreases rapidly as the number of consecutive successes increases.

Now it becomes obvious that the probability is extremely high that the Nasdaq will have a negative day. Furthermore, if there is a ninth negative day, the odds will be even better tomorrow.

If the pre-market is hinting of a possible negative day, how can you bet on this probability?

Firstly, we can reduce our exposure to the Nasdaq for each day the record streak continues. Secondly, we can start betting on the downside by for instance buying the SQQQ (ProShares UltraPro Short ETF). The ETF seeks a return that is -3x the return of the Nasdaq.

As always, I prefer the opposite setup where we can bet on the upside. However, in order to make an absolute return on your investments, sometimes you have to utilize shorts.