The adjective "random" is perhaps the most misused word pertaining to stock market. Although it is rarely the definition given, it is indeed something "made, done, happening, or chosen without method or conscious decision".
Carl Menger begins his introduction to economics by: "All things are subject to the law of cause and effect. This great principle knows no exception, and we would search in vain in the realm of experience for an example to the contrary. Human progress has no tendency to cast it in doubt, but rather the effect of confirming it and of always further widening knowledge of the scope of its validity."
Stock prices move up and down because people keep buying/shorting in hope to sell/buy at a better price. Several sciences study the causes of purposeful human action; so, it would be hard to argue any human action is uncaused.
If the actions of market participants cause price movements, and past price movements are a partial cause of the actions of traders, then past price movements must partially cause future price movements.
Hence even though people find price moves (of any time duration, intraday or weekly) as unpredictable, random, ineffective, and manipulative or in a nutshell, "surprising"; it follows that the "ineffectiveness" is in the predictive methodology of a trader, rather than the stock. As a trader develops a higher and higher understanding of the stocks, he categorizes fewer and fewer price moves with such adjectives.
However whatever be a trader's level in the market (click here to read more about levels in the market…) there are always such type of moves which he categorizes as random. Professional trading is about understanding acutely such useless moves in which the risk is unidentifiable.
This is all actually scientific. In science, we are willing to pretend there are random events, even though we know there must not be random events ("God does not plays dice with the universe") . In math, we are willing to pretend zero is a number, even though we know it must not be a number. A model with random events is useful. In most circumstances, a refusal to allow for random events would be harmful rather than helpful. The model with random events is simpler and more workable. The situation is much the same with zero. It isn't a number. To include zero as a number, one would have to put aside the principles of arithmetic. So, we don't do that. In school, we were taught that zero is a number, but that there are certain things we must never do with zero. We accepted that, because it was a simple, workable model. One should adopt the most useful model not the most honest model.
People never loose money because of the randomness in price behavior. What can be the "randomness" in one's trading methodology? Here are few unfortunate examples:
1.Trading on tips from one's broker, friend etc.
2.Hiring an investment advisor without thoroughly testing his past performance.
3.Trying to predict stock prices on impact from news like a company' quarterly earnings, CEO's statement etc.
4.Borrowed wisdom: assuming a set of premise to work in all market conditions.
5.Giving importance to price derivative rather than price behavior, like if indicator X moves beyond such value the stock is bullish.
6.Generalizing a premise like if GS has sharp volatile cycles than all NYSE finance stocks have similar cycles.
………..
Carl Menger begins his introduction to economics by: "All things are subject to the law of cause and effect. This great principle knows no exception, and we would search in vain in the realm of experience for an example to the contrary. Human progress has no tendency to cast it in doubt, but rather the effect of confirming it and of always further widening knowledge of the scope of its validity."
Stock prices move up and down because people keep buying/shorting in hope to sell/buy at a better price. Several sciences study the causes of purposeful human action; so, it would be hard to argue any human action is uncaused.
If the actions of market participants cause price movements, and past price movements are a partial cause of the actions of traders, then past price movements must partially cause future price movements.
Hence even though people find price moves (of any time duration, intraday or weekly) as unpredictable, random, ineffective, and manipulative or in a nutshell, "surprising"; it follows that the "ineffectiveness" is in the predictive methodology of a trader, rather than the stock. As a trader develops a higher and higher understanding of the stocks, he categorizes fewer and fewer price moves with such adjectives.
However whatever be a trader's level in the market (click here to read more about levels in the market…) there are always such type of moves which he categorizes as random. Professional trading is about understanding acutely such useless moves in which the risk is unidentifiable.
This is all actually scientific. In science, we are willing to pretend there are random events, even though we know there must not be random events ("God does not plays dice with the universe") . In math, we are willing to pretend zero is a number, even though we know it must not be a number. A model with random events is useful. In most circumstances, a refusal to allow for random events would be harmful rather than helpful. The model with random events is simpler and more workable. The situation is much the same with zero. It isn't a number. To include zero as a number, one would have to put aside the principles of arithmetic. So, we don't do that. In school, we were taught that zero is a number, but that there are certain things we must never do with zero. We accepted that, because it was a simple, workable model. One should adopt the most useful model not the most honest model.
People never loose money because of the randomness in price behavior. What can be the "randomness" in one's trading methodology? Here are few unfortunate examples:
1.Trading on tips from one's broker, friend etc.
2.Hiring an investment advisor without thoroughly testing his past performance.
3.Trying to predict stock prices on impact from news like a company' quarterly earnings, CEO's statement etc.
4.Borrowed wisdom: assuming a set of premise to work in all market conditions.
5.Giving importance to price derivative rather than price behavior, like if indicator X moves beyond such value the stock is bullish.
6.Generalizing a premise like if GS has sharp volatile cycles than all NYSE finance stocks have similar cycles.
………..
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