Efficient Market Hypothesis (EMH)

The efficient market hypothesis, associated with Eugene Fama and a large literature before and after him, says that prices incorporate information to the point that a trader cannot consistently earn excess returns after adjusting for risk and costs. The weak form says you cannot do it with past prices. The semi-strong form says you cannot do it with public information. The strong form says you cannot do it even with private information. The strong form is the one most people, including most academics, do not believe, because insider trading cases exist. The weak and semi-strong forms are the ones that collide with technical analysis. If the weak form is strictly true, chart patterns and indicators have no edge once costs are paid. That is a claim about averages and about the difficulty of the game. It is not a claim that every market is calm, rational, or correctly priced in a moral sense.

Use EMH as the sceptic in the room, not as a religion. The burden of proof is on the pattern. A setup that looks good on a chart has to survive costs, slippage, a reasonable sample, and a regime that was not hand-picked. Many published anomalies were real and then faded after they were public and crowded, which is exactly what a competitive market would do. Other patterns persist because they are compensation for a risk or a constraint, a trend premium that shows up with ugly drawdowns, a liquidity premium that shows up by being hard to trade. Compensation for pain is not a free edge. It can still be a reason to take the other side of the trade, knowingly.

Let the hypothesis change your standards, not your curiosity. Prefer simple rules you can test. Be suspicious of methods with enough discretion to always fit. Subtract costs before you believe a win rate. Assume that an obvious pattern everyone can see is closer to fairly priced than a structural constraint, a forced seller, a rebalance, an expiry, that you can actually name. Technical work is not pointless if EMH is roughly true. It is harder, and its gains are more likely to be a payment for bearing a specific risk than a discovery of a secret shape. Size and risk management matter even more if your edge is small, because a small edge with a large blowup is not an edge.

Hearing EMH as "prices never move too far" or "you cannot make money." People make money. The claim is about excess return after risk and cost, and about consistency, not about a single lucky year. Also hearing a rebuttal in every bubble. Bubbles are embarrassing for the tidiest versions of efficiency and still, after costs and timing, hard to short safely. And dismissing all research because a textbook said markets are efficient. The literature itself is full of exceptions, arguments, and failed exceptions.

EMH is a family of models, not a single test you can run on your platform. Markets can be efficient enough to punish sloppy technical trading and inefficient enough to pay a careful trader in a corner the models ignore. The hypothesis says little about your specific short-term setup until you measure it. It also does not manage your risk. An efficient market can still gap, and a true fair price is not the same as a price you can exit. Use the idea to stay humble. Do not use it as an excuse to skip the journal, and do not use a rejection of it as an excuse to trust a pattern you have never counted.