What is Random Walk Theory?

Random Walk Theory Definition. Random Walk Theory is an efficient market hypothesis, stating that prices of a currency, stock or commodity move on a random basis versus their intrinsic value. The theory claims that the price of an asset incorporates all known available information and posits that the ability to forecast future price behavior is therefore impossible. Academics and critics often use this theory to dispel the validity of technical analysis to use previous pricing movements to forecast the future direction of markets. Paul Cooner developed this theory in 1964 using the hypothesis of an efficient marketplace, one that assimilates all current information to set current prices. The forex market has often been labeled as the most efficient market. All markets do have a degree of randomness, but to the chagrin of academics and politicians, markets do tend to move in wave patterns, not straight lines. These wave patterns react to physical laws governing the behavior of forces in nature, and the field of technical analysis is based on relating these very laws to price behavior in the market. The success of technical traders and their use of indicators to give consistent guidance related to profitable entry and exit points for currency trading is proof enough for many to discount the comments of Random Walk Theory proponents. There have also been studies conducted using super computers that fully contradict the Random Walk Theory.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.