Question

In what ways does the Efficient Market Hypothesis challenge the assumptions of Technical Analysis?

What is the implication of the strong form of the Efficient Market Hypothesis (EMH) on the practice of insider trading? Do you think that the strong form of EMH holds

Answer 1

The efficient market hyptothesis challange the assumptions of technical analysis in the following ways

1.Role of historical data

Technical analysts argue that prices and investors tend to follow predictabe patterns. Once identified,those patterns can be used to anticipate future trading opportunities for market average returns. While according to the EMH , security prices already reflect all available information that includes investors sentiment and all recurring phenomenon that might produce those trends again.

2. Self fulfilling technical trading

Large numbers of speculative traders can push the price of a large numbers of speculative traders can push the price of a security beyond is market clearing level. Thus some traders contend that if enough traders are using similar technical valuation techniques ,technical analysis could create a self fulfilling prophesy.

Strong form of efficient market hypothesis implies that profits exceeding normal returns cannot be realized regardless of the amount of research or information investors have access to. It  is the only part of the EMH that takes into account proprietary information.

Strong form of EMH holds because it states that all information – both the information available to the public and any information not publicly known – is completely accounted for in current stock prices, and there is no type of information that can give an investor an advantage on the market.