Chapter 4. The Technical Analysis Controversy
After studying this chapter, you should have a good understanding of
• The basic principles of the Random Walk Hypothesis (RWH)
• The historical distribution of stock market returns
• The basic principles of the Efficient Markets Hypothesis (EMH)
• The pragmatic criticisms of technical analysis
• How technical analysts respond to critics
Do Markets Follow a Random Walk?
A random walk occurs when future price movement cannot be predicted by observing past price movement. If prices move in a random fashion, then no underlying patterns can exist in stock prices.
Sornette has studied periods in the stock market when successive losses, referred to as drawdowns, have occurred. ...