Introduction to the Art and Science of Technical Analysis
information received. Instantaneously means acting or responding immediately
to new information. Therefore, for the market to efficiently discount or reflect all
information, all of its participants must act on all of the information in the same
manner instantaneously. See Figure 1.27.
EMH contends that since the markets are efficient, there is no point in
employing technical analysis, as prices would have already adjusted to the new
information and the analyst would have no way of forecasting future action with-
out such information. The reality is that there is discounting in the markets, but
it is in no way perfectly efficient. In other words, the markets are at best semi
efficient. This is because it is impossible to have all market participants acting
instantaneously and rationally. It is a physical and logistical impossibility in the
physical world. A simple “handclap” test will prove the point. If a large group of
participants was asked to clap in response to a specific single event like the ring
of a bell, we would find that there is little chance of observing a perfectly coordi-
nated handclap across the group once such an event occurred.
As we have already discussed earlier, not all participants in the real world
would react in exactly the same manner or arrive at the same logical decision
based on the new information. Some market participants may have a different
view of the markets and view the new information as inconsequential with minor
impact on the markets, and may even trade against the new information. Also,
there are a large number of strategies that one can employ to trade the markets
based on the same information. As a result, when new bullish information is re-
leased, participants may:■ (^) Enter a long position immediately
■ (^) Enter a short position based on an average‐up scale‐trading strategy
fIgure 1.27 Efficient Market Adjusting to New Information.