Evaluating the Efficient Market Hypothesis by Using the Forex Example - Essay Example

Also, Fama assumed that capital circulation has lower transaction cost. As such, every investor shares the same quality of information, under a perfectly efficient market, and so investors are unable to generate excessive returns. If the securities market was perfectly efficient then fundamental analyses and technical analyses would not be useful at all. Fundamentalists, who are centered on the ‘intrinsic value’, assert that the main failure of EMH is being too focused on long-term equilibrium while at the same time not paying any attention to the companies’ activities that generate those performances.

Also, the important relationships between the financial market and businesses, or the success or failure of an investment, are really based on the factors that influence the good or bad performance of any business. For example, omitting central bank policy intervention may lead to the wrong understanding of a market being instability, thus resulting in a huge loss (Shostak 1997). Technicians who are against the hypothesis of the efficient market assert that the price moves in predictable (non-stationary) trend, which allows investors to make abnormal profits from the different psychologies and trading styles.

The Wall Street Journal editor Charles Dow deemed the technical analysis to be a new approach to studying the moving trends affected by the attitudes of participants towards different economic, monetary, political and psychological factors. Since the technical approach deems the price to be an outward manifestation of mass psychology, the analysis will tend to predict the future price based on the large of the number of participants’ moods between panic, panic or confidence, greed, and optimism (Pring 1991; Neely and Weller 2011).

Therefore, technicians disagree with the Efficient Market Hypothesis that all investors are rational.