Stock Price Behavior and Trading**

In recent years, there has been considerable interest in the random walk theory of stock price behavior. This theory, as applied to the stock market, implies that past stock-price movements cannot be used to predict future market prices in such a way as to “profit†from the predictions. By not “profiting,†we mean that a trader using the past history of stock prices cannot apply mechanical decision rules that result in a consistently better performance than a simple buy and hold strategy. If stock price movements were to become systematic so that a “profit†were possible, proponents of the random walk theory argue that a sufficient number of market participants would quickly recognize the recurring pattern and exploit it. In exploiting it, they would drive out the opportunity for “profit,†causing the price series to approximate a random walk.