In order to maximize profits traders over time begin an in-depth study of the patterns of the financial market. Is it possible to predict future price changes ahead of time? Can the efficient market theory be applied for that?
Basic forms of efficiency
Before moving on to the basics of the Efficient Market Hypothesis, let’s examine what forms of market efficiency are distinguished by financial analysts. All financial forecasts are built on the belief that markets have a strong form of efficiency and price is reflected based on all the information received.
Efficient Market Hypothesis
The Efficient Market Hypothesis, EMH, is a hypothesis whose main tenet is the claim that the market price of a currency, stock or oil is fair and based on all available information. In simple words, at the moment the value of a certain unit must be exactly that and not any other. Natural disasters, revolutions, wars, crises, etc. affect price formation. The EMH theory states that the available information reaches each market participant in equal parts instantly. This means that investors make profits based on the execution of actions necessary at the moment.
Efficient Market Hypothesis arose as a result of disputes over the ability to predict the market situation in advance. Traders at currency exchanges were always interested in possibility of profit increase by means of news research and analysis of price change charts. The generally accepted variant of the theory was suggested by American economist Eugene Fama in the 1960s. He thought that the degree of market efficiency depends on the ability of its participants to quickly react to new information.
Throughout its history, the market was not very efficient. The situation changed only in the late 20th century thanks to the development of television, and the appearance of smartphones and the Internet made information available to all. Now every trader has free access to the important news, which, of course, helps in professional activity. The market efficiency is influenced by its operational component, which displays the speed of price reaction to the incoming information. The developed market allows the lightning-fast display of the incoming data in the price of the asset.
According to Fama’s theory, an investor has an opportunity to receive super profits only if he works in an informationally effective market. If you are ready to start your way as a trader, it’s time to choose a reliable broker at https://topbrokers.com/forex-brokers-for-usa-traders.