Is Market Behaviour Random?

Random Walk Theory maintains that market movements are random, that stock price changes cannot be predicted by studying past prices. Random walk theorists compare historical price data to a series of coin tosses. They argue that since the outcome of a coin toss is not dependent on the results of earlier tosses, historical coin-toss data are of no predictive value whatever. If the analogy holds, then past price data are also independent, unlinked, and of no predictive value.

Random walk arguments fail to recognize that traders act with purpose. Since price activity is the result of traders acting out intentions, aggregate intention is often discernible in the behavior of price and volume. Since knowledge of intent has predictive value, markets are predictable.

Random walk supporters maintain that markets are moved by news. By definition, news is random, cannot be anticipated (or it would not be news), and therefore price movement is random and cannot be anticipated. They fail to take into account that the flow of price and volume activity is also news. Traders respond to that news just as they respond to other sorts of news, and so forge causal links between past price-volume data and future price movement. Price-volume data are causally linked because traders link them.

Random events can and do perturb prices unexpectedly, and the incessant clash of buyers and sellers often produces more noise than music. Nevertheless, from time to time the purposes of buyers and sellers collect sufficiently to produce a signal strong enough to be heard through the din.

The artful student is able to detect and exploit these opportunities, which present themselves daily.

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