Is The Stock Market Random?

It is often said that financial markets are entirely random and thus unpredictable, and the more time you spend watching stocks, the more this appears to be true. While some market movements seem obvious, e.g., a mining exploration company finds a gold deposit pushing their stock up, others can be entirely perplexing, e.g., a company posts strong results and a positive outlook, yet the stock falls.

If the market was entirely random on every level, then trading would be as good an investment strategy as playing the roulette wheel. But chances are, if you’re reading this, you believe there are patterns within the market that can be exploited to gain an edge.

Stock markets are comprised of millions of participants, each acting in their own self-interest and making decisions based on their own unique perspective, influenced by the limited knowledge available to them. Each participant is trading their own strategy or lack thereof, meaning reactions to events vary wildly from investor to investor. The near-infinite combination of participants, events, and reactions combine to create a market environment that is unpredictable and often chaotic.

But amongst the chaos, patterns emerge as participants with overlapping goals allocate their capital in the same direction. The collective of individuals moving independently along the same trajectory is the force behind momentum and trends, establishing patterns that are themselves used as entries or exits by other participants.

Identifying, testing, refining, and maintaining strategies around these movements and patterns is where the trader’s edge is established. Though it will never be possible to predict market movements with anywhere near 100% accuracy, consistent profitability over the long term is demonstrably achievable.

If you’re interested in testing your own theories and developing your own strategies, consider our Beginner’s Guide To Building Trading Strategies.