The Efficient Market Hypothesis (EMH) Weak Form posits that current stock prices reflect all past trading information, including historical prices and volumes. This implies that technical analysis, which relies on past price movements to forecast future price changes, is ineffective for generating excess returns. According to this theory, any patterns or trends that can be observed in historical data are already incorporated into current prices, making it impossible to consistently outperform the market through such methods.
Additionally, the weak form suggests that price movements are largely random and follow a random walk, meaning that future price changes are independent of past price movements. This can be mathematically represented as:
where is the price at time , is the price at the previous time period, and represents a random error term. Overall, the weak form of EMH underlines the importance of market efficiency and challenges the validity of strategies based solely on historical data.
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