Is the financial market random?
Disclaimer
This article is my own opinion, based on my experience. It is not financial advice.
‘Random’ understanding
First, we have to understand what ‘random’ is. To comprehend this word, we can go to random.org, the website that is used all over the world to generate accidental numbers for lottery, games, etc. And what does this website tell us? At first, they differentiate “random” into two categories ‘true’ and ‘pseudo’ random. Basically ‘pseudo’ random, is something that we usually called as random in daily life. ‘Pseudo’ random means, that behind generated random value we have just mathematical formula. For example, the most popular way to generate a random value in software engineering is by using a date, so basically when we create a random value, we have a formula with one ‘x’ that will be replaced by the current date and produce a value that we call ‘random’. But as you understand, it is not ‘true’ random, because if you know the formula you can just replace ‘x’ with any date, a future date for example, and predict the value. The website that was mentioned above used a different approach to generate ‘true’ random value: “The randomness comes from atmospheric noise”. So they use external unpredictable physical variables and this we can call ‘true’ random because you basically would not know the value of physical variables in some specific moment of time. Of course, in the future, with technological improvement maybe we will be able to predict physical variables, and this approach will be known as ‘pseudo’ random, but for the current moment, we can’t.
Now we know what random word means, but before we return to market data, I want to ask you one more question. Is coin toss random? And the short answer is no. And I will briefly explain why.
As was mentioned above, behind every random, we have a formula that produces value. This is coin tossing, not exclusion. At first look, it may seem as ‘true’ random but basically, it is not. What difference between the coin toss and ‘atmospheric noise’ that is used for generating ‘true’ random value? For ‘true’ random we don’t know what affects the result or even if we know, we can’t get this all data or analyze it fast enough. For coin toss, the situation is a little bit different because we know what influences coin toss mostly: wind, toss strength, metal defects, toss angle, etc. So basically, if you know all parameters, you can predict the result. And it was even done. You can find more information about this on the internet.
Finance market
Let’s return to the market. My opinion is that the market for the current moment is 50% ‘true’ random and 50% ‘pseudo’. The main reason why it is 50% ‘pseudo’ — ‘people’. Behind every market movement, behind everything that happens in the market stays people. And people do not think in random ways, we have emotions, logic, and so on. So if you can get all this data (people’s behavior, business news, price action, etc.), and create the formula, you will be able to predict the market with really high accuracy.
But, I have to disappoint you it is not an easy task, the market has much more input data in comparison with the coin toss it is more close to atmospheric noise, we probably know what influences the market, but we can’t get this all information, and analyze it really fast. So it was the other 50% of ‘true’ random.
Also sometimes other algorithm traders or investors can say that a low timeframe (≤ 1D) is random but a high timeframe can be predicted ( ≥ 1W). And I can agree with them, but the point here is that higher timeframes just have less information to analyze, and almost don’t have a time limitation. You are not required to know what happened in low timeframes to analyze high timeframes.
Conclusions
We have two types of randomness — ‘true’ and ‘pseudo’. And the difference between them is that for ‘true’ random we usually don’t know what influence it, or even if we know we can’t get and process such an amount of data. Market 50/50 ‘pseudo’ and ‘true’ random, we mostly understand what influences the market but we can’t process data, at least now.
P. S.
It is more than welcome to discuss this topic in the comments, I will try to answer all questions. By the way, you can reach me by the information below and ask questions directly.
Hi, I am a software engineer, algorithmic trader, and investor. And my goal is to retire early and create passive income. I strongly believed that it will be easier to achieve this with the right surroundings.
So if you are also interested in this or maybe you have some idea or suggestion. reach me with:
Email: dmytro.finance1@gmail.com
Telegram: https://t.me/sd_d_soft
