Randomness plays a greater role in the financial market than most people are aware of. Nevertheless, market prices are not results of pure random numbers.
The following chart shows the price performance of the oldest and most important index in the world, the Dow Jones Industrial Average, for the year 2016. One can see a curved line whose maximum (about 20,000) and minimum (about 15,700) differ by about 20% within the year.
In the next figure, a model of market prices is presented, in which prices are modeled as a sequence of pure random numbers. As to be seen immediately, this result has nothing to do with a normal price chart, the prices vary between the maximum (about 33,000) and the minimum (about 0) by about 100%. If a stock market index would look like this, the financial market and the society would collapse immediately. At one day, the price of a share costs a fortune, the next day this share would be offered for less than the value of a green apple. The shares are linked to the company stakes and thus to the jobs of millions of employees. Compared to this situation the collapse of the Lehman Brothers bank and the global economic crisis in 2008 would only be a slight perturbation, and we would find ourselves living next to Mad Max. The market prices are therefore not purely random numbers, this modeling is too simple.
Taking into account that every stock market price is based on its previous value and differs from it only slightly upwards or downwards, a different model can be manifested. In this model the differences of the prices are modeled by means of reciprocal (1 / x) random numbers, meaning that the next number differs only by a small difference from the previous one, smaller differences being more probable than larger differences. A price chart modelled this way is practically no longer distinguishable from a real price chart, as to be seen in the next figure.
If the the market prices were exclusively based on randomness, it would not be possible to win money with trading in the long term. There are several reasons for this: on one hand, the rising prices and the declining prices would be balanced out over a longer period; on the other hand, the classic trend following trading systems would no longer work.
Therefore, which reason allows some traders making money at the stock market, even over a long period of time? The answer to this question is: The trend.