[Summary]
Random walk theory is the idea that price fluctuations are difficult to predict.
What is most likely to fail with random walk theory is not the lack of knowledge itself, but the situation in which a hasty decision is justified afterwards.
In actual investing, we start by emphasizing diversification and cost control over forecasting. However, we cannot overlook the fact that it is easy to misunderstand something if nothing can be analyzed.
In this article, we will organize the random walk theory not as "knowledge" but as a procedure to confirm before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
The first thing to differentiate using random walk theory is
When looking at random walk theory, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. Random walk theory is not the only material for making decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Situations where random walk theory is likely to fail
If we look at random walk theory as a failure pattern, we must first make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What we see in random walk theory |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Random walk theory stumbles not only when you lack knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Don't decide whether to buy or sell the moment you see the random walk theory.
- Do not mix the time axis that fits the random walk theory with your own holding period.
- Don't increase your position to recoup your losses
- Don't make a decision just based on SNS or rankings.
The important thing here is not to decide on a single correct answer based on random walk theory alone. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using random walk theory as a basis for actual judgment, check at least these five points.
- Can you explain in one sentence the purpose of looking at random walk theory?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of confirming the random walk theory is not to speed up the action, but to reduce unnecessary judgment errors.
Summary
Random walk theory is a material for organizing investment decisions. Even if you read it as a failure pattern, treating it as a standalone buy/sell signal will lead to poor judgment.
The points to keep in mind are as follows.
- Decide first the purpose of looking at random walk theory
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat the random walk theory as a tool to pause before buying or selling, rather than a word that forces you to make a hasty decision.