The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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the hAnDbook of teChnICAl AnAlysIs

by the participants. Not all participants will react to the same event or informa-
tion in the same way, and in fact, some participants may act on it in a contrary
fashion, that is, shorting the market rather than going long. They also argue that
not all of the participants will react at the same time. Some will take preemptive
action or act in anticipation of the event while other participants will act during
the actual receipt of the information. There will also be participants who may re-
act long after the information is released. Hence, trying to achieve a certain level
of coordinated action for efficient discounting will be virtually impossible.
The detractors of EMH also contend that for the markets to discount all in-
formation effectively, all participants must have access to that information and
must act on it. The market will otherwise be unable to discount or reflect all in-
formation effectively. This requirement itself presents a difficult challenge. They
argue that it is virtually impossible to get all of its participants to act on all of the
information. It is also unrealistic to expect all participants to have access to that
information, and even if they do, we cannot expect the participants to be standing
by at all times in readiness to act on such information. They further argue that
information is never free. It is unrealistic to expect that all participants are able to
afford the information, let alone all information.
There is a very subtle difference between efficient discounting in EMH and
basic market discounting in technical analysis. As far as market discounting in
technical analysis is concerned, there is no requirement of perfect efficiency ex-
cept for the requirement that it discounts everything that becomes known to it,
which includes the sum total of all actions taken by its participants, be it in a
timely or untimely, rational or irrational fashion. Market action itself represents
the ultimate truth and is a direct consequence of the market discounting all in-
formation known to it, regardless of whether the information is perfectly efficient
or otherwise. The market continues to discount all information and expectations
of such information as and when it unfolds and becomes known to the market.
The term efficiency therefore, as far it applies to the basic assumption in technical
analysis, refers to very act of discounting all information as it becomes known
to the market, regardless of the type, quality, or speed at which it receives the
information. For the technical analyst, price is (always) king and represents the
ultimate truth in the market. The markets are never wrong. All market action is
considered perfect and efficient under the basic premises of technical analysis.
Hence, we see that the term efficient does not carry the same meaning or implica-
tions as in the case of EMH. In EMH, efficient has a very specific meaning.
The premises upon which EMH are constructed require that all new informa-
tion be discounted immediately and rationally in order for the market to be perfectly
efficient. Efficient under EMH means that the market participants must react:



  1. Instantaneously to all market information

  2. Rationally to all market information


EMH requires new information in order for prices to change. Bullish news
will cause prices to rise and bearish news will drive prices down. Acting rationally
means that all participants will make the same logical decision based on the new

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