Random Walk Theory Random Walk Theory believes that the fluctuations of security prices are random. Like a person walking in the square, there is no rule where the price will go next.
In the securities market, price trends are affected by many factors.
A small and inconspicuous thing can have a huge impact on the market.
It can also be seen from the long-term price chart that prices have almost equal opportunities to rise and fall.
The existence value of all chart trendsetters is based on one assumption, that is, stocks, foreign exchange, gold, bonds, etc.
All investments are affected by economic, political, and social factors, and these factors, like history, keep repeating themselves.
For example, if the economy recovers from the Great Depression, property prices, stock markets, gold, etc. will all rise.
After it rises, it will fall, but after it falls, it will rise higher again.
Even in the short term, the laws governing all investment values ??are inseparable from the factors mentioned above. As long as investors can predict which factors control prices, they can predict future trends.
For stocks, chart trends, trading volume, price, etc. reflect the mentality of investors.
The reason for this mentality is that their income, age, understanding of the news, degree of digestion, and enthusiasm for confidence are all reflected by the stock price and transactions.
You can predict future stock price trends based on the chart.
However, the random walk theory opposes this statement and holds the opposite opinion.
The random walk theory points out that there are thousands of smart people in the stock market, not all of them are stupid.
Everyone knows how to analyze, and all data flowing into the market is open to everyone, and there is no secret.
Since you know it and I know it, the current price of stocks already reflects the relationship between supply and demand.
Or the value itself won’t be too far off.
The so-called intrinsic value is determined by looking at basic factors such as asset value per share, price-earnings ratio, and dividend payout ratio.
These factors are no big secret either.
Everyone can find this information when they open a newspaper or magazine.
If a stock asset is worth ten yuan, it will never become worth one hundred yuan or one yuan in the market.
No one in the market will buy the stock for one hundred dollars or sell it for one dollar.
The current market price of stocks basically represents the views of tens of millions of discerning people, forming a reasonable price.
The market price will fluctuate around the intrinsic value.
These fluctuations are random and have no trace.
The reasons for the fluctuations are: (1) New economic and political news flows into the market at random and irregularly.
(2) These news cause fundamental analysts to re-estimate the value of the stock and make trading targets, causing new changes in the stock.
(3) Because these news are traceless and come suddenly, and no one can predict and estimate them in advance, the stock trend speculation cannot be established, and what the chartists say is just nonsense.
(4) Since the prices of all stock prices in the market have reflected their basic values.
This value is fairly determined by buyers and sellers, and this value will not fluctuate again unless good or bad news such as wars, acquisitions, mergers, interest rate hikes and cuts, oil wars, etc. appear.
But no one knows whether the next news will be good or bad, so stocks currently have no memory system.
Yesterday's rise does not mean today's rise.
If it falls today, it can rise or fall tomorrow.
There is no correlation between the rise and fall from one day to another.
Just like tossing a coin, if the result is heads this time, it does not mean that the next throw will be heads. There is a 50% chance of heads or tails the next time.
No one knows whether it will be the bottom or the other side next time.
(5) Since the stock price has no memory system, any attempt to use stock price fluctuations to find a principle to defeat the market and win the market will definitely fail.
Because the stock price has no direction at all, wandering randomly, rising and falling randomly.
We cannot predict the direction of the stock market. No one is sure to win, and no one is sure to lose.
As for the role of stock experts, it is actually not very important, and it can even be said to be completely meaningless.
Because if they are so expert, they must use these theories to get rich themselves. How can they publish their research to make others rich?
The random walk theory is undoubtedly a powerful enemy of chartists. If the random walk theory is established, all stock experts will have no place to stand.
Therefore, many scholars have conducted research to see how credible this theory is.
Among countless studies, there are three studies that are particularly based on the random walk argument: (1) There was once a study that used the U.S. Standard & Poor's stock index (Standard & Poor) for long-term research and found that stocks rose or plummeted, with a sharp rise of four times.
Five times, or falling 99%, the proportion is only a small minority. Most stocks rise or fall by 10% to 30%.
There is a phenomenon of normal distribution in statistics.
That is, the greater the rise and fall, the smaller the proportion.
Therefore, there is no single trend in stock prices.
Buying stocks depends on whether you are lucky. You have an equal chance of buying stocks that are rising or stocks that are falling.
(2) In another experiment, a U.S. senator threw a financial newspaper with a dart and selected 20 stocks as an investment portfolio. As a result, this random investment portfolio performed similarly to the overall performance of the stock market, not to mention not inferior to experts.
The portfolios they recommend outperform even those suggested by some experts.
(3) Some people have also studied the performance of unit funds and found that those with good performance this year may perform the worst next year. Some funds that were disappointing in previous years may stand out this year and become the top performers.