The random walk theory is a theory that explains that "the movement of stock prices cannot be predicted." Simply put, no matter what has happened in the past, there is always a 5: 5 chance that tomorrow's market will go up or down.
However, I am not saying that you “Cannot profit from the market”. The share price is an estimate of the company's value, but since the company is expected to continue to operate and make a profit, it will grow in the long run. This is the same theory. The conclusion of this theory is that "Active management cannot defeat passive management in fund management."
Speculative trading is a method of aggressive buying and selling in order to generate P/L profit above the market average. The market average does not mean the average of the investment performance, but a stock index such as the SPX 500 average or the NASDAQ 100 average. In other words, regardless of whether the overall stock market is going up or down, the goal is to make more money anyway. Consequently, the person “Prop Trader” makes the decision to buy or sell.
On the other hand, the method of targeting investment returns equivalent to the market average is called “Passive investing”.
-If you are using the SPX 500 as an index investing, you can buy stocks from index and build a portfolio.
Much less room for human judgment right?
So why can't active trading outperform passive investing? In active trading, the professional manager makes full use of theory and data to determine when to buy and when to sell. However, using the theory of random walks based on the theory of probability, it is impossible to predict the market price no matter which method is used. Sometimes it succeeds, and sometimes it does not, and the result is at the level of the market average. However, active trading is more expensive for managers and inventory analysis, so the results are worse than passive investing.
How to avoid random walk situations
-Trade only liquid markets
-Trade only blue chips
-Trade with mkt flows
-Trade during mkt opening or in the mid-day