Many people wonder whether algorithmic trading the way we do – in the timeframe of minutes, days, or weeks – can really work, since they often relate this to high frequency trading, expensive IT equipment, or a hedge fund with hundreds of PhDs. In this article I would like to discuss first on a theoretical basis and then a bit more practical why and how it can work.
The efficient market hypothesis
Let’s start with a quote from Wikipedia:
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to “beat the market” consistently on a risk-adjusted basis since market prices should only react to new information.
Eugen Fama together with Robert J. Shiller und Lars Peter Hansen even received a Nobel Price “for their empirical analysis of asset prices”. One of the consequences was that investors came to the conclusion that managed funds cannot beat the market and therefore ETFs (exchange traded funds) who have lower costs became very popular of the last years. This Nobel Price was awarded in 2013, but the actual work of the scientists was done many years before.