Wednesday, August 28, 2019
Does the efficient market theory apply on the FOREX market Essay
Does the efficient market theory apply on the FOREX market - Essay Example If the trend is looking upwards, the person Ã¢â¬Å"BÃ¢â¬ will buy the stock. In both cases, both persons got to the same conclusion of buying the stock of the same company, but their methods were entirely different. The person Ã¢â¬Å"BÃ¢â¬ does not even have to visit the company to do the technical analysis. Now implying the same method on the foreign exchange market, we can deduct whether the efficient market hypothesis is workable in the FOREX market or he not. For that we need to know the basics of the efficient market hypothesis. The efficient market hypothesis can be viewed as having three levels or stages; the weak form, the semi strong and the strong form. The weak form or the weak stage states that the price of the security or stock at any point in time reflects the true value of the stock, meaning that we cannot predict the stockÃ¢â¬â¢s movement from the price of the stock. All the values or the fundamentals of the company (all the negative and positive aspects) are already reflected in the stock price; therefore it is useless to do the fundamental analysis. All the publicly available information has been incorporated in the stock price. The semi-strong form or stage of the hypothesis states that the current stock price reflects all the available public information and the prices instantly change to reflect the new public information. The third stage of string form efficient states that even the insider information cannot affect the stock price. 3. Rationale for the chosen topic My reason for choosing this topic is the huge appeal in the foreign exchange market. The greatest portion of finance is in the foreign exchange by volume. The reason for this tradeÃ¢â¬â¢s usefulness is that every trade of goods, stocks, bonds, gold silver and the like... The aim of this discussion is to decide whether the efficient market hypothesis is applicable to the foreign exchange market or not. We will try to analyze a small portion from the history of the price fluctuations of the US Dollar Vs the Euro. We will see how the figures react against the technical analysis. We will test their validity and present our conclusion. My reason for choosing this topic is the huge appeal in the foreign exchange market. The greatest portion of finance is in the foreign exchange by volume. The reason for this tradeÃ¢â¬â¢s usefulness is that every trade of goods, stocks, bonds, gold silver and the like is done through currency and there comes the conversion process. That is why it is so prevalent that to escape the ups and downs of the foreign exchange becomes impossible. The other rationale is that IÃ¢â¬â¢m interested in both the fundamental and technical analysis. I believe in the perfect fusion of the both. One important thing for the efficient market hypothesis to be effective is the assumptions, which serve as the rationale for it. One of the assumptions is that a large number of market participants are constantly analyzing the stocks and bonds. They do it on their own, independent of each other. This gives a more subtle and objective evaluation of the security.