Entropy

DEFINITION of 'Entropy'

A mathematical measurement of the degree of uncertainty of a random variable. Entropy in this sense is essentially a measure of randomness. It is typically used by financial analysts and market technicians to determine the chances of a specific type of behavior by a security or market.

BREAKING DOWN 'Entropy'

Entropy has long been a source of study and debate by market analysts and traders. It is used in quantitative analysis, and can help predict the probability that a security will move in a certain direction or according to a certain pattern. Volatile securities have greater entropy than stable ones that remain relatively constant in price. The concept of entropy is explored in "A Random Walk Down Wall Street."

RELATED TERMS
  1. Random Factor Analysis

    A statistical analysis performed to determine the origin of random ...
  2. Data Smoothing

    The use of an algorithm to remove noise from a data set, allowing ...
  3. Random Walk Theory

    The theory that stock price changes have the same distribution ...
  4. Log-Normal Distribution

    A statistical distribution of random variables which have a normally ...
  5. Quantitative Analysis

    A business or financial analysis technique that seeks to understand ...
  6. Statistically Significant

    The likelihood that a result or relationship is caused by something ...
Related Articles
  1. Fundamental Analysis

    Financial Markets: Random, Cyclical Or Both?

    Are the markets random or cyclical? It depends on who you ask. Here, we go over both sides of the argument.
  2. Active Trading

    Random Reinforcement: Why Most Traders Fail

    This phenomenon can cause a trader to abandon a proven strategy or risk everything on chance. Find out how to avoid it.
  3. Active Trading

    Viewing The Market As Organized Chaos

    Find out how a cat and a ladybug prove markets are both random and efficient.
  4. Options & Futures

    Stock-Picking Strategies: Technical Analysis

    Technical analysis is the polar opposite of fundamental analysis, which is the basis of every method explored so far in this tutorial. Technical analysts, or technicians, select stocks by analyzing ...
  5. Professionals

    Quantitative Analyst: Career Path & Qualifications

    Learn about the work that quantitative financial analysts do everyday, and determine what it takes to become a successful professional in the field.
  6. Fundamental Analysis

    Find The Right Fit With Probability Distributions

    Discover a few of the most popular probability distributions and how to calculate them.
  7. Fundamental Analysis

    Intro to Stationary and Non-Stationary Processes

    Refining data points is the key to applying financial series time data to stock analysis.
  8. Fundamental Analysis

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  9. Stock Analysis

    Revisiting Your ABCs

    These ten stocks - chosen by ticker name alone - are compared, one year after an initial assessment.
  10. Investing Basics

    A Quick Guide On Behavioral Funds

    Investopedia explores the working of behavioral funds, their benefits and risks, and an analysis of their past returns.
RELATED FAQS
  1. What is the "random walk theory" and what does it mean for investors?

    The random walk theory is the occurrence of an event determined by a series of random movements - in other words, events ... Read Answer >>
  2. What are the advantages of using a simple random sample to study a larger population?

    Learn how simple random sampling works and what advantages it offers over other sampling methods when selecting a research ... Read Answer >>
  3. When is it better to use systematic over simple random sampling?

    Learn when systematic sampling is better than simple random sampling, such as in the absence of data patterns and when there ... Read Answer >>
  4. What are the disadvantages of using a simple random sample to approximate a larger ...

    Learn what a simple random sample is, how researchers use it as a statistical tool and the disadvantages it carries when ... Read Answer >>
  5. How do researchers ensure that a simple random sample is an accurate representation ...

    Learn which methods researchers employ to ensure that a simple random sample best approximates the larger population being ... Read Answer >>
  6. How does stratified random sampling influence government policy decisions?

    Understand how governments use stratified random sampling to collect more precise data to help in making better informed ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center