Have you heard of the term “Random Walk” as it relates to trading strategies?
The author Burton Malkiel wrote the book “A Random Walk Down Wall Street” in 1973, and has served to be kind of a bible to those in the investment community that believe that predicting forward price movement is impossible.
This, of course, flies directly in the face of those that use technical charting studies to analyze price behavior and predict future movement.
So you have two religious “camps” in the investing community:
Which camp do I ascribe to? Actually, both.
I DO believe that price can do whatever it wants, WHENEVER it wants to. Actually predicting the forward movement of price action is a fool’s errand.
But I also believe in the power of analyzing price movement and patterns, and some things repeat over and over again. Range Expansion leads to Range Contraction. Exhaustion leads to Consolidation. Those don’t change. Instead of forecasting future price movement, I will go so far as to give the benefit of the doubt to one direction or another. Strong convictions, loosely held.
I use a somewhat hybrid approach that allows me to see and react to what’s actually happening, instead of forming a bias based on what I think SHOULD happen.
The longer that I have been trading, the more that I admit to myself that I don’t know what’s going to happen in the next five minutes, let alone in the next month. That affords me a sort of freedom in a way, but only if I’m using a strategy designed to work with this “Random Walk” approach.
In general, strategies designed to work with a Random Walk approach are generally better reward-to-risk, and exchange a decreased probability of success for better reward-to-risk. They also have more mechanical entry conditions, instead of waiting for a specific technical signal.
Learning about and using them might make a difference in your trading. Ask us how you can get started.
In your corner……..Doc Severson
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