What is an Efficient Market?

An efficient market has a very precise definition, and that is that it is one where the prices reflect all the relevant information that the market has available to it, and that this is reflected in a non biased way.

Now, if this is the case, it leads to an interesting question... if currencies are indeed priced in a manner that is efficient, then why do they move?

In other words, why do the transactions take place that affect and have a knock on over enough volume to the price?

The answer is simply different interpretations of the data... different analysts and traders will have different views as to what is going to happen and this results in those individual transactions, there is no total consensus on an exact price even if people might agree in a directional sense as to what is going to happen.

Now, an efficient market, it turns out, can be tested in the sense that people can see if market behaviour is consistent or inconsistent in its reaction to certain events and pieces of data; if it is consistent then it seems this theory is correct.

The analysts have actually worked out and determined a range of different market types, in fact three types, which are outlined in the following articles.

The Efficient Markets Hypothesis
Central Bank Intervention in the Markets
Risk and Foreign Exchange
Is exchange rate forecasting successful
Semi-Strong Market Efficiency

What is an Efficient Market?

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