Market Behavior Principles

Several fundamental concepts govern how we understand market behavior:

Random Walk Hypothesis: This foundational theory suggests price changes are largely independent of past movements—future price changes cannot be predicted from historical patterns alone. This forms the mathematical foundation of the Efficient Market Hypothesis.

Efficient Market Hypothesis (EMH): Suggests markets rapidly incorporate available information into prices. In its strong form, this would make consistent outperformance impossible. However, numerous market anomalies challenge perfect efficiency.

Non-Stationarity: Financial time series exhibit changing statistical properties over time. Relationships between variables, volatility patterns, and correlation structures evolve, creating fundamental challenges for prediction.

Regime Changes: Markets transition between distinct states—bull markets, bear markets, high/low volatility regimes, crisis periods—each with different rules governing asset behavior and relationships.

These principles highlight why financial prediction is extraordinarily difficult: the system itself evolves, past relationships may not hold in the future, and the signal-to-noise ratio is extremely low, with most price movements being effectively random.