The Illusion of Randomness in the Market
The idea that the market is random, when properly considered, is ridiculous. In fact, randomness in any context is wholly an illusion. It is just a word we ascribe to situations we feel that we cannot predict or fully comprehend the causality surrounding it. In the scientific community, the apex of randomness is the “Brownian Motion”experiment, where particles are observed moving randomly as they are buffeted by other unseen particles. However, if we knew the speed, mass and position of all the particles within the experiment, we would be able to predict the exact position and timing of every movement! It is exactly the same with financial markets. Price movements are caused by the value and timing of buy and sell transactions, and if we were able to ascertain the intentions of every trader in the market we would be able to predict every single move in price! So markets are not random, just effectively random to us on smaller time frames as we cannot possibly determine all the information required to accurately predict market movements.
The truth about technical analysis on smaller time frames is that it can sometimes provide a statistical edge (a very small one). For example, certain technical formations, over large samples, might show a 53% probability that the price will move 10% in one direction before the other. So the market can sometimes be beaten, even by simple technical analysis. It can be beaten even more easily by traders who realize that the same technical formations that show a 53% probability of a 10% move might also show a far more profitable 35% probability of 40%. All speculative markets can be beaten, in the long run, by strategies which cut losers short and allow winning trades to run in an unlimited fashion.
Ultimately having a good risk management system in place is vital to the success of any trader, regardless of if the market is random or not. Here at Currency.com we will always encourage you to be aware of your own personal appetite for risk and manage risk accordingly. Sometimes, it’s good to reflect on the psychology of the market as a whole, as we’ve done with this post, however, it could be argued that it is far more important to reflect on your own personal trading psychology to ensure that you aren’t doing anything “random” when you trade.
Twitter . Facebook . Telegram . Instagram . Reddit . Linkedin .
