Random Walk Theory
The random walk theory states that stock price movements are unpredictable,
making it impossible to know where prices are headed. The
random walk theory asserts that stock prices cannot be predicted
from prior prices because no relationship exists between the two sets
of prices. Events occur randomly, which then affect stock prices. An
illustration of this theory is the flipping of a coin. The outcomes are
not affected by previous throws.
Burton G. Malkiel, in his book, A Random Walk Down Wall
Street (1990), argues that investors would do no better or worse than
the market averages if they chose their investments by throwing
darts at stock tables. The reason is that information about stocks
occurs randomly, and then the stocks will react to the news. Bad
news causes a stock’s price to go down immediately, and good
news has an immediate positive effect on a stock’s price. The news
about a stock cannot be anticipated accurately, which results in a
random occurrence, meaning that stock prices move randomly.
According to Dremen (1991), analysts were only accurate 40 percent
of the time in forecasting the next quarter’s earnings for companies
they followed. Thus stocks react in advance of anticipated good or
bad news, and by the time the news is announced, it is already
reflected in the stock price. The random walk theory implies
that technical analysis is a waste of time in that prices cannot be
predicted from historical data.
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Categories in Trading Mistakes
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Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor
Using too much Leverage
Determining the proper capital requirements for trading is a difficult task
Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure
Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader
Useful Advices to Beginning Trader
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All about Stocks
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