I recently read several articles with the exact same title but written by different authors, all discussing efficiency. I can’t say I agree with everything written there, so I decided to write this post because I believe the topic is truly important. I see no point in arguing with the authors since, in my opinion, there are no universal patterns in the market, and anyone can be right. Instead of criticism, I prefer to present an alternative perspective, which I will outline below.
Let’s start with the classic definition of efficiency. Efficiency is the ratio between achieved results and the resources spent. In other words, efficiency describes how optimally time, effort, finances, and other resources are used to achieve set goals. The higher the efficiency, the more results are obtained with fewer resources. Based on this definition, efficiency appears to be an absolute measure. However, it is important to note that this definition implicitly assumes static, unchanging, and equal conditions for all similar experiments.
For more than 50 years, the concept of an efficient market has existed. An efficient market is one where asset prices at any given time fully reflect all available information. The very existence of an efficient market has been widely debated, which is why it remains a hypothesis—The Efficient Market Hypothesis (EMH), developed by Eugene Fama in the late 1960s or early 1970s. Less than 50 years later, in 2013, he was awarded the Nobel Prize in Economics for this hypothesis, suggesting that the global community acknowledges its validity. The hypothesis includes three forms of market efficiency, which demonstrate how well prices reflect information at any given moment, or in other words, how accessible information is to all market participants simultaneously.
Market efficiency is not about how much profit you can make, and it is not about earnings at all. It is about whether all market participants are on equal footing and have equal access to market resources. However, such a definition makes systematic excess profits impossible without taking on additional risk. Here, we introduce a new term—risk-taking, which was not present in the classic definition of efficiency.
At this point, it’s time to distinguish between market efficiency and trader efficiency. A trader’s efficiency depends on available capital, professionalism, time, and the level of risk they are willing to take. In this case, we are no longer talking about absolute efficiency but rather relative efficiency, which is determined by each trader’s initial conditions. In my view, it would be more reasonable to replace the term “efficiency” in relation to a trader with “profitability” or “trader success,” as this better reflects the relativity of the concept.
I once heard a story about a trader who took $300,000 under management and, within a year, turned it into $30 million through intraday trading on the USD/JPY currency pair. Do you consider this trader efficient? Would you entrust him with your money? The investor did not fully settle with the trader, so he refused to continue working with him. Given his impressive results, the trader easily raised $15 million in new investments. Again, would you give him your money based on that performance? A year later, using the same strategy, his capital had shrunk to around $700,000. Considering that the yen was hitting historical lows at the time, it’s possible he lost everything. But let’s focus on the number $700,000—it’s nearly 20 times less than his peak capital, but still more than double his original $300,000 using the same strategy.
What is the takeaway from this? In my opinion, discussing the efficiency of any trading strategy is misguided. Instead, we should talk about a trader’s professionalism and their ability to manage trade volumes, take risks, and protect profits. Searching for the best strategy, signal, or pattern is a road to nowhere.
