Co-Founder & CTO of I Know First Ltd. With over 35 years of research in AI and machine learning. Dr. Roitman earned a Ph.D from the Weizmann Institute of Science

Several tools are popularly applied in the world of stock trading, such as algorithms, market forecasts, and detailed analyses of specific stocks. Regardless of the theory or the practice one takes up, the very basics of stock trading are split into three distinct categories: Random walk, stock trends and stock wave.



The random walk model describes the instantaneous trading of every moment of every trading hour of the day as a random process. An individual trade is a result of two players, each sending a buy and sell order. One trade appears to be completely independent from the previous one, and thus the next trade may or may not be predictable at all. With true random walk, there is unlikely to be any knowledge in the collected information to make stock forecasts. This random walk model also plays into the hands of the so called efficient market theory, which says that the market instantly absorbs new information and re-prices the stock accordingly. This long disproved theory claims that it is statistically impossible to win by trading.

However, when one analyses the results of many trades, an orderly pattern of trend may emerge, and it may contain information not only about the past, but also about the future of the stock. It is an object of study of random or pseudo random walk probability analysis to decide whether the stock is mean-reverting or trending, and on what time scale. One who can tell the difference can make a considerable profit at the expense of those who can’t.

What is a Stock Wave?

The trend is what appears to be happening looking back. It is easy to spot a trend of stocks over a day, a week or a month. However, trends are the results of studying the past. Trends are not a forecasting tool.

Stock wave, on the other hand, is a resource that is used for forecasting. While trends are generally the outcome of fundamentals, stock wave is a pattern that is derived from popular opinion, traders’ perception, market sentiments and the drift that stocks may be shown over time. A stock wave can be easily explained through the following example.

A certain stock is doing well and traders of course have noticed the same. As part of a chain reaction, more traders begin to buy the specific stock. This is what a stock wave is. It is not a trend nor is it a momentary random walk but a pattern that can predict the near future of a stock. The often used terms like “overbought” or “oversold” are implicit in the stock wave approach.

Why is Stock Wave Analysis a better tool than trend?

Trends are often spotted after a stock has been traded considerably and significantly to have been classified as a trend. It is likely that when the trends are spotted, the stock is headed for a reversal. It is highly difficult to spot a trend when it has just started off.

When stock wave is identified, the risk is lower, you are buying into trend early enough, and have a foresight to exit the wave before it crashes. A person looking at the stock chart and common indicators could sometimes guess the future direction of the stock. However, this guess may be mixed with some degree of wishful thinking and personal biases. A better approach is to use computer based algorithms, which can analyze many stocks simultaneously, and arrive at a quantifiable founded objective guess as to the future of the stock wave.

.