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 shortterm trading and eight to 64 periods for longterm 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 longterm RWI is greater than 1.0 and the shortterm RWI lows peak above 1.0. Short positions may be entered when the longterm RWI of the lows is greater than 1.0 and the shortterm 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.

Data Smoothing
The use of an algorithm to remove noise from a data set, allowing ... 
Simple Random Sample
A subset of a statistical population in which each member of ... 
Joseph Effect
The idea that movements in a time series tend to be part of larger ... 
Weak Form Efficiency
One of the different degrees of efficient market hypothesis (EMH) ... 
Strong Form Efficiency
Strong form efficiency is a type of market efficiency that states ... 
Zig Zag Indicator
The Zig Zag indicator is used to help identify price trends. ...

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. 
Trading
4 ways to predict market performance
Learn about four different views of the market and future pricing, including supporting academic research. 
Trading
The Seasonality Of The U.S. Dollar
The longterm history of the U.S. dollar suggests that it is often stronger earlier in the year. 
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 ... 
Investing
3 Reasons Why Timing the Market Doesn't Work
Research has shown that market timers underperform even a random coin flip. 
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? 
Trading
Intro to Types of Trading: Technical Traders
Explore in detail the technical trading approach, which looks to the past to predict the future.

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 >> 
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 >> 
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 >> 
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 >> 
What Does It Mean When There Is 'Price Action'?
Price action refers to the daytoday fluctuation in the price of an asset. Read Answer >>