Predicting Stock Moves: Is it Possible? // Brownian Motion in Finance

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 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

test attribution text

Add Comment