Predicting Stock Moves: Is it Possible? // Brownian Motion in Finance with David Moadel
hey everybody welcome to looking at the markets this is a pretty cool picture
here can you see it it's a bunch of random movements it's a dot moving all
over the place just randomly it's pretty cool I got this off of Wikipedia if you
go to Wikipedia and type in Brownian motion which is what we're gonna be
talking about today and randomness the randomness in science and math and the
randomness in the stock market it's pretty cool page you might want to check
it out just type Brownian motion into Wikipedia
here's another one check that out look at all those dots moving all over the
place randomly that's called Brownian motion it's a good term to know I want
to see another one here we go that's all right off of the Wikipedia
page look at that bouncing all off of each other there's no way to predict the
movements of all those little dots they just go wherever they go so let's talk
about Brownian motion and how it applies and how it can make you a better stock
trader and investor not just stocks options crypto currencies Forex
commodities whatever it is it all applies so what is this Brownian motion
it refers to either the physical phenomenon that minut little particles
immersed in a fluid move around randomly like those pictures we just saw or for
math people it's the mathematical models used to describe those random movements
so it's in science it's in math Brownian motion was discovered by the biologist
Robert Brown back way back in 1827 and while Brown was studying pollen
particles floating in water under a microscope he observed those little
minut particles in the pollen grains executing a jittery random motion kind
of like maybe like this right or maybe more like this or like this whatever it
is and for you math people out there if
you'd like to see the the geometric Brownian motion the formula there it is
it's okay if you don't understand it that's fine you don't have to but there
it is if your internet or you can just google it the mathematical theory of
Brownian motion has been applied in contexts ranging far beyond the movement
of particles in fluids mathematicians generally agree that stock markets the
foreign exchange markets commodity markets and bond markets follow Brownian
motion where assets are changing continually over very small intervals of
time and the asset prices are being altered by random amounts in other words
they're constantly moving small amounts pretty much randomly now let me give you
my thoughts on that really quickly is it really random stock price
movements I guess if somebody was god-like and
they could know everything that was going on in every investors brain and
they could know every political situation going on and they could know
what every every sentiment every thought everything though with all the factors
maybe it's not random to somebody who's omniscient and all-knowing theoretically
speaking but for us humans since we cannot know
everything that's going on then it is random to us I think it's relatively
random even if it's not absolutely random that's how I feel about it so as
as far as we're concerned for all intents and practical purposes yeah
since we're not omniscient it is pretty random I think at least in the
short-term and that's what they're talking about with Brownian motion
they're talking about the very small very short-term moves the options market
generally agrees on this as well that's why options prices which are calculated
using the black Scholes model you can google that and the black Scholes model
includes geometric Brownian motion in other words option
prices factor in a certain amount of randomness in other words a lack of
knowing where stock prices will go in the future all right
so options the options market knows this they know that the short term movements
in the future are random pretty much so yeah in other words option prices factor
in a certain amount of that randomness to put it another way
both mathematicians and the options market agree that people cannot predict
the direction of the market or an individual stock they know that but
beginners in the stock market or options market cryptocurrency markets and so on
don't usually know this beginners tend to think that there is someone out there
who can predict where a stock option cryptocurrency whatever is going to go
in the short term whether it's a minute from now an hour from now tomorrow next
week whatever all right so I want you to get out of that beginner mindset if
you're in it right now if you think there's somebody out there who knows
where a stock is going to go or a cryptocurrency you know currency pair or
commodity whatever if you believe that there's somebody out there that knows
where it's gonna go in the very short term in the next hour or day or even
week for that matter I would recommend that you go back and study Brownian
motion really look look at those dots and understand that mathematicians know
it seasoned traders and investors know it most of them I hope the options
market knows it and the options market is very sophisticated and they have a
lot more resources and data than you and I do
so think about Brownian motion think about randomness understand it and that
doesn't mean that it's all random over the long term the S&P 500
for example has a tendency to go upwards over time so that's why I say in the
short term it's random over the long term did you know that if you had bought
the S&P 500 stocks at any point in history of the stock market in the u.s.
20 years later you would have made a profit okay so no matter when you bought
it even at the worst possible time right before a crash so over the long term yes
it goes up so it's not completely random otherwise it wouldn't predictably go up
over any 20-year period that you choose so the stock market I believe it has
randomness in the short term but an upward bent or an upward tendency over
the long term it's random with an upward upward skew if you will but as far as
trying to predict in the next hour what's going to happen in the next
minute and the next day forget it and I'm not gonna try to sell you that and
I'm not interested in somebody trying to sell me that alright hope I gave you
something deep to think about some deep thoughts here Brownian motion check it
out google it you'll be glad you did it if you want some help with any of this
stuff putting together a trading or investing plan you can contact me email
David Modell at gmail.com if you like this video if it made you think go ahead
and hey leave a comment give it a thumbs up on the video there and feel free to
subscribe I'd really appreciate it if you did that thanks a lot I'll talk to
you again soon