Critiques to EMH and Validity of Technical Analysis

The Efficient Market Hypothesis (EMH) is a long-established theory applied to financial markets. Despite its simplicity and charm, it is nevertheless heavily criticized by many market participants. The many empirical tests carried out over the last few years on the EMH have not unequivocally been able to prove or disprove its validity. Many detractors, for instance, believe that the EMH does not take into account the behavioral aspects of investors, nor their imperfect knowledge of market information. Circumstances that may cause prices of financial assets to be undervalued or over-valued. Although it has become a cornerstone of modern financial theory, the EMH is highly opposed by traders, especially by followers of technical analysis.

Supporters of the EMH argue that, in the presence of perfectly efficient markets, investors would be better off investing in a passive portfolio, replicating the performance of the main market indices, with low management fees. The detractors of the EMH, on the other hand, believe that markets are not perfectly efficient, and it is this very imperfection that makes it possible for them to beat the market. In the presence of imperfect forex markets, for instance, currency pairs may momentarily deviate from their fair values. In theory, neither technical nor fundamental analysis can produce risk-adjusted excessive (alpha) returns consistently and only inside information can lead to profitable risk-adjusted returns. While the EMH denies that this can happen, technical analysts believe that reality shows that not all investors have the same information and that precisely these asymmetries can be exploited to earn extra profits.

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