DEFINITION of 'Random Walk Index'

The Random Walk Index is a technical indicator that compares a security’s price movements to random movements in an effort to determine if it’s in a statistically significant trend.

BREAKING DOWN 'Random Walk Index'

The Random Walk Index was created by Michael Poulos to determine if a security’s price is just a “random walk” or is the result of a statistically significant trend higher or lower. The technical indicator was originally published in Technical Analysis of Stocks and Commodities in 1991 in an article titled, “Of trends and random walks”.

Calculating the Random Walk Index

William Feller, a mathematician specializing in probability theory, proved that the bounds of randomness – or displacement distances – could be calculated by taking the square foot of the number of binary events (such as a coin toss). Any movement beyond these bounds suggests that the movement is not random in nature. The Random Walk Index applies these principles when measuring the uptrend and downtrend to determine if it’s random or not.

The calculation for high periods is: (HI – LO.n / (ATR.1(n) * SQRT(n)).

The calculation for low periods is: (HI.n – LO / (ATR.1(n) * SQRT(n)).

Using the Random Walk Index

The Random Walk Index is typically used over two to seven periods for short-term trading and eight to 64 periods for long-term trading, but traders may want to experiment with these numbers to see what works best for them.

Readings above 1.0 indicate that a security is trending higher or lower, while readings below 1.0 suggest that a security may be moving randomly. Often times, traders will enter a long position when the long-term RWI is greater than 1.0 and the short-term RWI lows peak above 1.0. Short positions may be entered when the long-term RWI of the lows is greater than 1.0 and the short-term RWI of the high peaks above 1.0.

The Bottom Line

The Random Walk Index is a technical indicator that compares a security’s price movements to random movements in an effort to determine if it’s in a statistically significant trend. In general, readings above 1.0 indicate that a security is trending, while readings below 1.0 indicate that the security’s prices may be random.

  1. Data Smoothing

    The use of an algorithm to remove noise from a data set, allowing ...
  2. Simple Random Sample

    A subset of a statistical population in which each member of ...
  3. Joseph Effect

    The idea that movements in a time series tend to be part of larger ...
  4. Weak Form Efficiency

    One of the different degrees of efficient market hypothesis (EMH) ...
  5. Strong Form Efficiency

    Strong form efficiency is a type of market efficiency that states ...
  6. Zig Zag Indicator

    The Zig Zag indicator is used to help identify price trends. ...
Related Articles
  1. Trading

    Financial Markets: Random, Cyclical or Both?

    Are the markets random or cyclical? Depends on whom you ask. We look at both sides of the argument.
  2. Trading

    4 ways to predict market performance

    Learn about four different views of the market and future pricing, including supporting academic research.
  3. Trading

    The Seasonality Of The U.S. Dollar

    The long-term history of the U.S. dollar suggests that it is often stronger earlier in the year.
  4. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...
  5. Investing

    3 Reasons Why Timing the Market Doesn't Work

    Research has shown that market timers underperform even a random coin flip.
  6. Insights

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  7. Trading

    Intro to Types of Trading: Technical Traders

    Explore in detail the technical trading approach, which looks to the past to predict the future.
  1. 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 >>
  2. 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 >>
  3. What is the difference between a simple random sample and a stratified random sample?

    Learn about the differences between simple random sampling and stratified random sampling, and the advantages of each method. Read Answer >>
  4. What are the pros and cons of stratified random sampling?

    Stratified random sampling provides a more accurate sampling of a population, but can be disadvantageous when researchers ... Read Answer >>
  5. What Does It Mean When There Is 'Price Action'?

    Price action refers to the day-to-day fluctuation in the price of an asset. Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center