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Efficient Market Hypothesis

The efficient market hypothesis (EMH) originated in the 1960s and


thanks to the work of economist Eugene Fama. This hypothesis holds that it is
impossible to beat the market, as prices in the market already incorporate and
reflect all relevant information which may impact a stock.

Marketing Efficiency suggests that prices reflect certain information relating to


asset pricing and that it is therefore not possible to earn abnormally high
average returns using said information.
As new info randomly arrives, prices will change randomly.

Weak form efficient:


A market is weak form efficiency if prices reflect all past price and trading
volume information i.e price and amounts of the assets sold. This therefore rules
out Technical analysis because with that information you cannot expect to earn
abnormal profits.

Semi-strong form efficient:


A market which reflects all past price, trading volume and all public information
(info related to economy like inflation rate, unemployment rate, industries, firms
whose shares you're dealing also the financial statements, etc too). So if the
market is Semi-strong efficient then you cannot use this information to earn
abnormal profits. Thus it rules out Fundamental analysis (using public info to
predict mis-prices of the assets)

Strong form efficient:


A market which reflects all past prices, trading volume, all public information
and all private information which is information that is not released out yet and
is known only by the selective people in the company eg CEO (insider private
information which isn't released to public). Thus in a Strong Form efficient
market, this information is also available with the public and therefore cannot be
used to earn abnormal profits. At this level no body can make abnormal profits
using all this information (because it is all being included).

Technical Analysis

Technical analysis is an analysis methodology for forecasting the direction


of prices through the study of past market data, primarily price and volume. It is
a trading discipline employed to evaluate securities and identify trading
opportunities by analyzing statistics gathered from trading activity, such as price
movement and volume. Unlike fundamental analysts, who attempt to evaluate a
security's intrinsic value, technical analysts focus on charts of price movement
and various analytical tools to evaluate a security's strength or weakness.
Technical Analysis assume that all information studied by Fundamental Analysis
is already estimated in the price of the given stock, ETF, commodity, currency, or
any other commodity.

Momentum and Moving Averages


Momentum is the tendency for rising asset prices to rise further, and falling
prices to keep falling. Momentum signals (e.g., 52-week high) have been shown
to be used by financial analysts in their buy and sell recommendations.
Finding the direction of current market momentum is an important step to
understand the trend and there by trade. This is where moving averages come to
play.
The moving average (MA) is a simple technical analysis tool that smooths out
price data by creating a constantly updated average price. The average is taken
over a specific period of time, like 10 days, 20 minutes, 30 weeks or any time
period the trader chooses. In statistics, a moving average (rolling average or
running average) is a calculation to analyze data points by creating series
of averages of different subsets of the full data set. Thus it is often used in
technical analysis of financial data, like stock prices, returns or trading volumes.

Sentiment Indicators

Sentiment indicator refers to a graphical or numerical indicator designed to


show how a group feels about the market or economy. Basically a measure of
investor sentiment in the market, measured by looking at the number of opening
long call options (buy at a price in future) to opening long put options (sell at a
price in future) purchased.
A sentiment indicator seeks to quantify how various factors, such as
unemployment, inflation, macroeconomic conditions or politics influence future
behavior.
Market sentiment is the feeling or tone of a market, or its crowd psychology, as
revealed through the activity and price movement of the securities traded in that
market. For example, rising prices would indicate a bullish market sentiment,
while falling prices would indicate a bearish market sentiment.
Sentiment indicators can be used by investors to see how optimistic or
pessimistic people are to current market conditions.

References:
Investopedia
https://www.youtube.com/watch?v=insF9UzB1bo

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