Random walk
Why does knowing last week's price change tell you almost nothing about next week's, and what does that imply for prediction?
In plain words
A random walk is a price path where each change is unrelated to the changes before it. Traders call a market that behaves this way unpredictable from its own history: the best guess of tomorrow's price is today's price, plus or minus nothing you can forecast.
Why it matters
If prices walk randomly, then chart patterns, momentum streaks and prior returns carry little information about what comes next. Risk still exists and still has to be sized, but the expectation should be uncertainty rather than a directional read built from what already happened.
In a real week: BTC, week of 22 July 2024
In the week of 22 July 2024, BTC opened at 68165.35 and closed at 68249.88, a return of 0.12%, after the prior four weeks returned -0.69%, -11.01%, 8.84% and 12.12%. A rising week followed a strong week, yet the move landed at the 47th percentile of history across 336 weeks, with realised volatility of 44.8% and a 9.37% range. The prior pattern pointed up; the outcome was near flat.
A common mistake
Reading random walk as a claim that prices never move far. They move plenty; the claim is that the direction and size of the next move cannot be read from the last one.