Editing Technical analysis (section)

====Random walk hypothesis====
The [[random walk hypothesis]] may be derived from the weak-form efficient markets hypothesis, which is based on the assumption that market participants take full account of any information contained in past price movements (but not necessarily other public information). In his book ''A Random Walk Down Wall Street'', Princeton economist [[Burton Malkiel]] said that technical forecasting tools such as pattern analysis must ultimately be self-defeating: "The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future."<ref>Burton Malkiel, A Random Walk Down Wall Street, W. W. Norton & Company (April 2003) p. 168.</ref>  Malkiel has stated that while momentum may explain some stock price movements, there is not enough momentum to make excess profits. Malkiel has compared technical analysis to "[[astrology]]".<ref name=huebscher>Robert Huebscher. [http://www.advisorperspectives.com/newsletters09/pdfs/Burton_Malkiel_Talks_the_Random_Walk.pdf Burton Malkiel Talks the Random Walk]. 7 July 2009.</ref>

In the late 1980s, professors Andrew Lo and Craig McKinlay published a paper which cast doubt on the random walk hypothesis. In a 1999 response to Malkiel, Lo and McKinlay collected empirical papers that questioned the hypothesis' applicability<ref>Lo, Andrew; MacKinlay, Craig. ''A Non-Random Walk Down Wall Street'', Princeton University Press, 1999. {{ISBN|978-0-691-05774-3}}</ref> that suggested a non-random and possibly predictive component to stock price movement, though they were careful to point out that rejecting random walk does not necessarily invalidate EMH, which is an entirely separate concept from RWH. In a 2000 paper, [[Andrew Lo]] back-analyzed data from the U.S. from 1962 to 1996 and found that "several technical indicators do provide incremental information and may have some practical value".<ref name=Foundations/> Burton Malkiel dismissed the irregularities mentioned by Lo and McKinlay as being too small to profit from.<ref name=huebscher/>

Technicians argue that the EMH and random walk theories both ignore the realities of markets, in that participants are not completely rational and that current price moves are not independent of previous moves.<ref name=Kahn/><ref>Poser, Steven W. (2003). ''Applying Elliott Wave Theory Profitably'', John Wiley and Sons, p. 71. {{ISBN|0-471-42007-7}}.</ref> Some signal processing researchers negate the random walk hypothesis that stock market prices resemble [[Wiener process]]es, because the statistical moments of such processes and real stock data vary significantly with respect to window size and [[similarity measure]].<ref>Eidenberger, Horst (2011). "Fundamental Media Understanding" Atpress. {{ISBN|978-3-8423-7917-6}}.</ref> They argue that feature transformations used for the description of audio and [[biosignal]]s can also be used to predict stock market prices successfully which would contradict the random walk hypothesis.

The random walk index (RWI) is a technical indicator that attempts to determine if a stock's price movement is random in nature or a result of a statistically significant trend.  The random walk index attempts to determine when the market is in a strong uptrend or downtrend by measuring price ranges over N and how it differs from what would be expected by a random walk (randomly going up or down).  The greater the range suggests a stronger trend.<ref>{{cite web|url=http://www.asiapacfinance.com/trading-strategies/technicalindicators/RandomWalkIndex|title=AsiaPacFinance.com Trading Indicator Glossary|access-date=1 August 2011|archive-url=https://web.archive.org/web/20110901022339/http://www.asiapacfinance.com/trading-strategies/technicalindicators/RandomWalkIndex|archive-date=1 September 2011|url-status=dead}}</ref>

Applying Kahneman and Tversky's [[prospect theory]] to price movements, Paul V. Azzopardi provided a possible explanation why fear makes prices fall sharply while greed pushes up prices gradually.<ref>Azzopardi, Paul V. (2012), "Why Financial Markets Rise Slowly but Fall Sharply: Analysing market behaviour with behavioural finance", Harriman House, ASIN: B00B0Y6JIC</ref>  This commonly observed behaviour of securities prices is sharply at odds with random walk.  By gauging greed and fear in the market,<ref>{{Cite web|url=https://money.cnn.com/data/fear-and-greed/|title=Fear & Greed Index - Investor Sentiment}}</ref> investors can better formulate long and short portfolio stances.