What Is '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 in order to determine if a security’s current price action is exhibiting “random walk” or is the result of a statistically significant trend, higher or lower. Random walk refers to market or security movement within the realm of statistical "noise" levels and not consistent with a confirmed or definable trend. The technical indicator was originally published in Technical Analysis of Stocks and Commodities (TASC) magazine in a 1990's article entitled, “Of Trends And Random Walks”. Market trend and random walk studies go back for decades, highlighted by R.A. Stevenson's publication of "Commodity Futures: Trends Or Random Walks?" in the March 1970 issue of The Journal Of Finance. 

Calculating the Random Walk Index

William Feller, a mathematician who specialized in probability theory, proved that the bounds of randomness, also known as displacement distances, could be calculated by taking the square foot of the number of binary events, which refer to two-sided outcomes with equal probability (like a coin toss). Logically speaking, any movement outside of these bounds suggests the movement is not inherently random in nature. The Random Walk Index applies these mathematical principles when measuring an uptrend and downtrend to determine if it’s random or statistically meaningful.

The calculation for high periods:

(HI – LO.n / (ATR.1(n) * SQRT(n))

Random Walk Index (RWI) is computed for each time segment by calculating the maximum of the following values for low periods:

(HI.n – LO / (ATR.1(n) * SQRT(n)).

Trading the Random Walk Index

The Random Walk Index is typically used over two to seven periods for short-term trading and scalping and eight to 64 periods for long-term trading and timed investment but market players may wish to experiment with these settings to determine what works best for their overall strategies. 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 and market timers will enter long positions 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.

  1. Random Factor Analysis

    Random factor analysis is a statistical technique to decipher ...
  2. Random Walk Theory

    The random walk theory is the idea that stocks take a random ...
  3. Random Variable

    A random variable is a variable whose value is unknown or a function ...
  4. Weak Form Efficiency

    Weak form efficiency is one of the degrees of efficient market ...
  5. Stratified Random Sampling

    Stratified random sampling is a method of sampling that involves ...
  6. Probability Density Function - ...

    Probability density function is a statistical expression defining ...
Related Articles
  1. Trading

    Random Reinforcement: Why Most Traders Fail

    This phenomenon can cause a trader to abandon a proven strategy or risk everything on chance.
  2. Investing

    What Are The Odds Of Scoring A Winning Trade?

    Just because you're on a winning streak doesn't mean you're a skilled trader. Find out why.
  3. Retirement

    Retirees: Find the Most Walkable Cities for Relocation

    When you're choosing a place to relocate when you retire, don't forget to check out its Walk Score.
  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. 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.
  6. Investing

    Most Common Probability Distributions

    In this article, we'll go over a few of the most popular probability distributions and show you how to calculate them.
  7. Personal Finance

    Your Mortgage: When It's Time to Walk Away

    Mathematically speaking, walking away can sometimes be the most prudent choice. Find out how to run the numbers.
  8. Investing

    The Evolution Of Money Management

    We look at the development of the money management profession and how it impacts professional money managers today.
  9. Investing

    Value Investing: 5 Tips to Consider in 2016

    Read five tips for value investors to consider in 2016, including how to look beyond traditional metrics and when to expand outside of the value zone.
  1. 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 >>
  2. What are the disadvantages of using a simple random sample to approximate a larger ...

    Learn here what a simple random sample is, how researchers use it as a statistical tool and the disadvantages it carries ... Read Answer >>
  3. What's an example of stratified random sampling?

    Stratified random sampling divides a population into subgroups or strata, whereby the members in each of the stratum formed ... Read Answer >>
  4. 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 >>
  5. What's the difference between a representative sample and a random sample?

    Explore the differences between representative samples and random samples, and discover how they are often used in tandem ... Read Answer >>
Trading Center