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In this post, I will consider the various forms of the Efficient Markets Hypothesis (EMH), their applicability to Technical Analysis (analysis of historical price movement to inform future trading decisions), and how these quantitative ideas could be viewed in terms of the qualitative ideas of applied social psychology.
The Efficient Markets Hypothesis (EMH) comes in three forms:
Weak Form
- The current price of a security fully reflects its historic price and trading history.
- Technical Analysis (TA) cannot be used to predict and/or beat the market.
Semi-Strong Form
- The current price of a security fully reflects all the public information available.
- Neither TA nor Fundamental Analysis (FA — analysis using financial statements such as the balance sheet, income statement, cash flow statement) can be used to predict and beat the market.
Strong Form
- The current price of a security fully reflects all public and private information available.
- Neither TA, FA, or Insider Trading (IT — the illegal use of privileged non-public and material information).
