Is price movement really random and unpredictable?

[nitrene]

Malkiel was an academician turned professional so he doesn't really believe there is an edge to any factor. His book also says monkeys throwing darts beat stock analysts returns.

I wrote a paper to show the math of the Black Scholes Theorem in college and stock movements come from the Physics concept of Brownian Motion which is supposed to be completely random but even that isn't entirely true.

 

[tomkat22]

I wouldn't say stock price is 100% random...but awfully close.

 

[Jzwu2017]

It’s sometimes easy to predict a red bar or green bar as it’s forming on a 5-min bar chart.

 

[padutrader]

good question!!!

why predict price, just know market condition then the price is predictable

i do not know about price but market condition is always predictable, whether it is trending or ranging and that is all i need to know if i have to trade correctly.

to make money you need not predict price but you do need to determine market condition accurately.

 

[Jzwu2017]

But even you get the market condition right, timing is critical.

 

[oraclewizard77]

But even you get the market condition right, timing is critical.

Better to be late then early. Better to buy high. Better to sell low.

 

[oshjdf]

Context is important when discussing the randomness of price. For example, trend following in day trading vs swing trading, price movement based on previous collective candles @ price structure, next candle based on previous single candle, etc.

Regarding your question of predictability of next bar and all other factors are ignored, even if the predictability is high, does it have positive expectancy (after put it together with TP, SL, fees)? It all comes down to positive expectancy.

 

[Laissez Faire]

My view is that prices are periodically random and periodically predictable. And generally, predicting the big picture, i.e., today will be up or down, is more predictable than predicting the micro (which is more subject to random price oscillations).

And I don't need anyone to agree or disagree with that since I know what's what through my own research and testing.

Keep in mind that prediction is about probabilities; not certainties. I.e., a certain outcome may have a 70 % chance which means you're still wrong 3 times out of 10.

Now, the curious question is what people are using to make predictions? Looking at a chart? How can you gauge probabilities simply by looking at a chart unless it's a specific set-up or similar which you back-tested and have the statistics for? If not, it seems more like guessing or shooting from the hip as opposed to prediction.

I use price data in tabular form for my predictions and statistical inquiries. That way, I can ask questions like: "X just happened. What happened next after X happened the last 10 times...?"

For example, for yesterday, I checked what typically happens after a trend day up (as I've defined it in my data). And the market pretty much did as expected, historically.

 

[engineering]

No. Stock prices are not random.

People at assume they're random because some models used assume randomness. These people are just missing the point that they're only using those models because they don't have better ones.
A less than perfect model is often better than no model at all.

Stocks are strongly affected by things like news events, cash flow, macroeconomics, etc.
There also may be contracts involved where specific actions are triggered based on stock price, meaning future price movement is clearly not independent of previous price movement.


Something like a random walk model is virtually guaranteed to be wrong over a long enough period of time.

 

[kroxobor]

If asset prices are primarily driven by information arriving in the market and since this information is by definition unknown until it arrives it is fair to view prices as random. So it looks like that making money is all about finding inefficiencies in how this information is priced in and taking advantage of them.