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What is the random walk hypothesis?

What is the random walk hypothesis?

The Random Walk Hypothesis states that in an efficient market, prices will correlate around the intrinsic value of securities, but there will always be a randomization and unpredictability to it.

The Random Walk Hypothesis suggests that technical analysis and the efforts of chartists cannot beat the market over time, because the market will move randomly and unpredictably, and past results cannot predict future returns.

RWH is in line with efficient market theory, which holds that all relevant information will be openly available to market participants, and that the self-interest of the participants will cause them to react instantaneously to new information, and that the intrinsic value and future value of securities will always be priced-in to the best of everyone’s knowledge.

Since no one can say when or how new information will turn up, it is futile to attempt to predict the future trends of the market in any significant way. The supply and demand will find equilibrium over time, but the randomness of the walk is also affected by the instantaneous supply and demand, moment to moment, which is up to chance.

Fibonacci retracement in particular seeks to apply chaos theory to find mathematical trends in this unpredictable environment.

Keywords: technical analysis, efficient market theory, chaos theory, Fibonacci Retracement, supply and demand, chartists, market equilibrium,