Is price action random, or is there order in the markets? I have heard arguments for and against, but many are fooled and just plain wrong if they believe that price action is random in any market. While it is true that there is some very short term noise in almost any market, there is still a rhyme and a reason to price movements, and if you learn the language of the charts then you will quickly realize that the markets are definitely not random. If you have been around trading for very long, or have even read much on trading, then you have probably read about “market efficiency” and heard the talk about how efficient markets truly are, and this fact alone is proof that markets are not random. There is no way that markets could be both random and efficient at the same time, as those two words or descriptions just do not go hand in hand. Most people will agree with you that markets are indeed efficient, and if you watch some of my videos, I will show you that market efficiency.
Even though most people will tell you that the markets are efficient, many of those same people, including academic types, will then turn around and argue with you that the markets are random and have no real sense of overall order or direction. How could a market without order or a sense of direction ever be efficient? The reason most people choose to believe that markets are random is because they have no idea how to determine what a market is doing. They don’t understand price action, so they can’t read the language that all charts speak, and trust me, they do speak a language all of their own. Just like learning a foreign language, learning the language of the charts is not easy. It takes study, practice and experience to become fluent in the language of the charts. However, once you learn to hear the markets speak or learn to read the chart, you will suddenly find that trading profitably is not nearly as hard as it is when you can’t read the chart.
Anyone that is trading that can not read a price chart is in essence gambling, and profitable traders do not gamble. Even if they don’t realize it, profitable traders have learned to read the price chart, so they may not even know that they understand price action trading, but instead they learned the language unconsciously over time, just as a child learns to speak unconsciously over time as they grow and age. I ran across the following article at www.tradeonehouraday.com and it had a really interesting article on market randomness. Below is an excerpt from that article.
In order to be a successful trader, you must understand the true realities of the markets. You must learn how the professionals make money and what is possible. Most traders come into commodity trading, lose a substantial portion of their capital and then leave trading without ever having a correct perception of what good trading is all about.
For many years college professors have argued that the markets are both random and highly efficient. If this were true, it would be impossible to gain an edge on other investors by having superior knowledge or a superior approach.
The Real Truth is . . .
Professional traders, who make their living trading rather than studying the markets from afar, have always laughed at these ivory tower theories. The random market theory is manifestly false, it has been disproven by professional traders who consistently outperform the averages over a period of several years. Institutions may be well advised to invest in index funds rather than making specific investment decisions, but the reason is to be found in their substandard performance, not in the impossibility of outperforming the averages.
These professors go on to argue that the commodity markets are chaotic systems. Such systems can produce random-looking results that are not truly random. They claim that chaos research has proved that the markets are not efficient, and they are not forecastable. They believe that all commodity market price movement is highly random with a small trend component.
Predictable to a certain degree . . .
Most beginning traders assume that the way to make money is to learn how to predict where market prices are going next. As chaos theory suggests, the truth is that the markets are not predictable except in the most general way.
In his book, Methods of a Wall Street Master, famous trader Vic Sperandeo, whose nickname is “Trader Vic,” warns: “Many people make the mistake of thinking that market behavior is truly unpredictable. Nonsense. Trading in the markets is an odds game, and the object is always to keep the odds in your favor.”
Luckily, as Trader Vic suggests, successful trading does not require effective prediction mechanisms. Good trading involves following trends in a time frame where you can be profitable. You can read the rest of the original article here.
While I agree with most of what Trader Vic says, I disagree that you can not use predictive strategies to trade profitably. I believe without a doubt that you can predict, with a high degree of accuracy, where the market is going in the short term. Enough so anyway, that we can put the odds heavily in our favor. Where it truly gets hard at predicting market direction is in the longer term, but predicting where prices are going in the short term is much easier done that many would believe. If you can learn to read a price chart, which isn’t easy by the way, then you can become a profitable trader. We have traders that are so good at reading a price chart that many say that their trading results, which are very high win percentages, are not even possible. We don’t even argue with those types any longer, because we know the truth. It’s not easy to learn, and like learning any other language that is not native to you, it takes hard work and dedication, but if you put your mind to it and stay with it, most anyone can eventually learn how to read a price chart, which is nothing more than price action trading!
In wrapping this up, we will ask you again, is price action random? We say no, price action is not simply random movements, so if you would like to learn the language of the charts, and if you want to learn to become consistently profitable through price action trading, then you have come to the right place. We have pages and pages of information here on our website that talk about and teach our price action trading strategies. If you want to learn price action, you can get more details by going to http://priceactiontradingsystem.com/pats-price-action-trading-manual.