the hAnDbook of teChnICAl AnAlysIs■ (^) Scale in more positions as the market rises
■ (^) Scale out positions that may have already been in profit
■ (^) Wait for prices to become overextended before fading the breakout
Even if the market participants were to act rationally and all make the same
logical decisions based on the new information, they may not be able to act on
the information instantaneously. They may have received delayed information or
were not standing by in readiness to act on the information when it arrived. They
may also find it physically impossible to act on all information, especially when
information streams in continuously in very quick succession. They may also be
unable to afford the cost of such information. As such, the discounting of new
information will take place at a slower rate, with a semi‐efficient market adjusting
gradually to the new information as market participants compete with each other
for the best fills. See Figure 1.28.
Figure 1.29 is a 5‐min chart of the EURUSD depicting the markets adjust-
ing to new information, in this case the nonfarm payroll and unemployment
report. Notice how prices swing back and forth as traders compete with each
other in light of the new information. Price finally makes a top at the 61.8
percent Fibonacci projection (projecting AB from Point C) level and begins
consolidating.
Nevertheless, EMH assumes three basic levels of information discounting:
- The Weak Form: The weak form of EMH suggests that all current prices have
already been fully discounted and, as such, reflect all past price information.
Therefore, they cannot impact future prices. The application of technical anal-
ysis is therefore pointless and meaningless.
fIgure 1.28 A Semi‐Efficient Market Gradually Adjusting to New Information.