The Efficient Market Hypothesis
The Efficient Market Hypothesis (EMH) is a financial theory according to which financial markets and the price of assets encompass all available information at any given time. The theory was developed by economist Eugene Fama in the ‘60s, and its important corollary says that it is nearly impossible for traders to beat the market, or to obtain an extra gain, in the long run. The EMH theory represents a great challenge for traders, as the impossibility to beat the market would imply that exploiting technical indicators in order to increase the profitability of daily trading activity is useless. This also means that if the EMH holds, the price of assets will be always valued at their fair price, as no hidden information is on the market.
The EMH theory distinguish between three levels of available information: weak, semi-strong, and strong.
The weak form of EMH implies that current prices of assets take into account all historical data, with no exception. However, it omits other kinds of information and this is why this form does not deny the usefulness of fundamental analysis or extensive macroeconomic research to gain an edge.
The semi-strong form of EMH affirms that all public information is encompassed into prices (financial news, financial statements by companies, etc.). This form does not deny the existence of private information and holds that even fundamental analysis cannot gain any edge. A trader can beat the market only by exploiting private information, not yet disclosed to the public.
Finally, the strong form of EMH says that all public and private information is reflected in the price of assets: historical performance, public information, private statements, any data available to insiders. If this hypothesis holds, than there is no way for investors to gain an edge by exploiting any type of information, as the market will have already priced in that information.