V.4:2 (50-52): Random walk prices by Clifford J. Sherry, Ph.D.

V.4:2 (50-52): Random walk prices by Clifford J. Sherry, Ph.D.
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Random walk prices by Clifford J. Sherry, Ph.D.

Are your trades based on skill or luck? Sherry's simple "Skill Score" will show you how to determine whether your decisions are based on your trading prowess or the luck of the draw.

A recent article by Tomek and Querin (Journal of Futures Markets 1984) highlights some of the questions that speculators and, particularly, technical analysts have or should have about how commodity prices are generated by a random walk process. This means that they believe that price generation is random and independent.

A common example of a random and independent process is tossing a fair coin. When you toss a coin in the air, whether it lands heads or tails up is determined randomly. If you were to record the outcome of a large series of throws, you would expect about a 50-50 distribution of heads and tails. An independent process means that it does not possess a "memory"; that is, if you throw the coin five times and get five heads, this has no influence on the outcome of the sixth throw. It is as likely to come up a head or tail as the first throw.

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