Whimsical movements of the exchange rate and the mystery of random walks

Whimsical Market Movements

“When you think it will go up, it goes down. When you think it will go down, it goes up.”
When watching the exchange market, haven’t you had an experience like this? It moves contrary to the direction you predicted. Have you ever been surprised or puzzled by such whimsical market movements?

In fact, the next move—whether it will go “up” or “down”—is unknown until the result comes out. And only after the result is known do we understand whether “the prediction at that time was correct or incorrect.” This is the market’s “uncertainty.”

What is a Random Walk?

One of the concepts used to express this kind of market uncertainty is the “random walk.” A random walk refers to movements where the next step is completely random and unpredictable.

Examples of Random Walk

• At each step, you decide to move “to the right” or “to the left” with 50% probability each.
• The next step’s direction is entirely random, and even if you know that one of the outcomes will occur, it is impossible to predict which one.

Random Walk in Nature

In nature too, such random movements are often observed. For example:

1. Petals floating on the water surface
   Petals drift irregularly to the right and left due to wind and waves on the water surface.

2. Brownian motion
   A phenomenon where tiny particles move randomly as they collide with surrounding molecules in liquid or gas.

These movements lack regularity, making it difficult to predict which direction they will go next.

Random Walk in Financial Markets

So, does this random walk apply to the foreign exchange market as well?

If the exchange market were a perfect random walk, predicting the next move would be theoretically impossible. Yet in reality, traders use technical analysis and fundamental analysis to try to forecast future movements.

Determining whether the market is truly a random walk or whether some underlying regularity exists is very important.

Schrödinger’s Cat and Market Similarities

Here, let's recall the famous physics thought experiment “Schrödinger’s Cat.”

What is Schrödinger’s Cat?

• There is a cat in a box, and it is said to exist in both “alive” and “dead” states simultaneously.
• Until an observer opens the box and checks, the cat’s life or death is not determined—a bizarre property of quantum mechanics.

This thought experiment is used to discuss the uncertainty that results from “the outcome being determined by observation” in quantum mechanics. However, Schrödinger himself emphasized that such ambiguous states do not exist in reality, using this example to critique the instability of quantum mechanics. In other words, this theory was proposed as a critique of quantum mechanical instability.

Connection to the Market

In the foreign exchange market, there is a similar kind of uncertainty: the direction of the next move is undetermined, but the outcome is determined after the move occurs, akin to Schrödinger’s cat.

• Random Walk Prices: Whether the next step will be “up” or “down” is unknown, and either outcome occurs with 50% probability.
• Prices as Observation Results: After the price actually moves, the result “went up” or “went down” is confirmed for the first time.

However, as Schrödinger emphasized, the market is not completely random. In other words, there may be some underlying regularities or trends hidden in the movement. This is a crucial point when analyzing the market.

Next Episode Preview

Next time, we will explore how to utilize the concept of the “random walk” in the market. In particular, we will focus on the mechanism of the “ratchet mechanism,” which converts random movement into driving force, and discuss ways to generate profits in irregular markets.

Let’s explore together how to generate consistent profits amid the whimsy of market movements!