What Is the Random Walk Theory?
The random walk theory claims that the future movements of stock prices cannot be predicted based on past movements. While admitting that long-term market prices do rise, it states that short-term movements are practically random and unpredictable. It rejects both technical analysis and fundamental analysis as valid tools for predicting stock behavior. Proponents of the random walk theory typically advocate long-term investing rather than trying to time the market. Though the theory was first investigated in 1953, it didn’t gain popularity until the book A Random Walk Down Wall Street was published by American economist Burton Malkiel in 1973. The theory essentially states that market prices follow a random path up and down, much like the random walk mathematical function. In a random walk function, a trajectory is determined by a succession of random steps, either up or down. It can accurately describe a number of natural phenomena, including the paths of gas molecules and animals ali
