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Random Walk theory has been
developed by statisticians in the academic world. The theory
holds that stock prices move at random and not in accord with
predictable patterns of behavior. On this basis, stock market
analysis is pointless as nothing can be gained from studying
trends, patterns, or the inherent strength or weakness of
individual securities.
Amateurs, no matter how
successful they are in other fields, usually find it difficult
to understand the strange, "unreasonable," sometimes
drastic, seemingly random ways of the market. Academics are
intelligent people, and to explain their own inability to
predict market behavior, some of them simply assert that
prediction is impossible. Many facts contradict this conclusion,
and not all of them are at the abstract level. For instance, the
mere existence of very successful professionals who make
hundreds, or even thousands, of buy and sell decisions a year
flatly disproves the Random Walk idea, as does the existence of
portfolio managers and analysts who manage to pilot brilliant
careers over a professional lifetime. Statistically speaking,
these performances prove that the forces animating the market's
progression are not random or due solely to chance. The market
has a nature, and some people perceive enough about that
nature to attain success. A very short term speculator who makes
tens of decisions a week and makes money each week has
accomplished something akin to tossing a coin fifty times in a
row with the coin falling "heads" each time. David
Bergamini, in Mathematics, stated,
Tossing a coin is an exercise in
probability theory which everyone has tried. Calling either
heads or tails is a fair bet because the chance of either result
is one half. No one expects a coin to fall heads once in every
two tosses, but in a large number of tosses, the results tend to
even out. For a coin to fall heads fifty consecutive times would
take a million men tossing coins ten times a minute for forty
hours a week, and then it would only happen once every nine
centuries.
An indication of how far the
Random Walk theory is removed from reality is the chart of the
Supercycle in Figure 5-3 from Lesson 27, reproduced below.
Action on the NYSE does not create a formless jumble wandering
without rhyme or reason. Hour after hour, day after day and year
after year, the DJIA's price changes create a succession of
waves dividing and subdividing into patterns that perfectly fit
Elliott's basic tenets as he laid them out forty years ago.
Thus, as the reader of this book may witness, the Elliott Wave
Principle challenges the Random Walk theory at every turn.
Figure 5-3
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