Random Walk Theory
Updated on March 19, 2023
Random Walk Theory is a financial market hypothesis that states that stock prices are not predictable and move randomly. This means that the price of an asset cannot be predicted based on past market data, and future price movements are determined by a series of random events.
Understanding Random Walk Theory
According to this theory, it is impossible to consistently beat the market through technical or fundamental analysis because all relevant information is already reflected in the current price, and future price movements are completely random.
Therefore, any attempts to predict the future price of an asset would result in the same accuracy as a coin flip, making the theory supportive of the efficient market hypothesis.
While the Random Walk Theory has been widely debated in financial circles, many market participants continue to use technical and fundamental analysis to inform their investment decisions.