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The Real Context of the Markets This
first module begins by putting into

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the current market situation.

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This information is of vital importance.

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It forms part of the foundations of the
most theoretical aspect of the knowledge

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we need and on which we build all
subsequent training resources.

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The markets have undergone a paradigm
shift.

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In just a few years, as a result of
technological advances, Trading in them

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gone from being carried out entirely in
person to being carried out totally

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electronically.

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This has contributed to the emergence of
new players in the world of investing,

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new ways of trading, and even new
markets.

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All this has undeniably led to the
democratization of investing, allowing

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to retail traders who, up to only a few
years ago, were prohibited from

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participating.

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In this regard, It is no coincidence
that most retail traders end up with

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losses. The entire industry is set up
for this to be the case and for

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participation to simply serve as yet
another very small source of liquidity

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the market.

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It is important that you keep your feet
on the ground.

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The world of trading and investing is
too complex for a home -based retail

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trader with an internet connection and a
computer to obtain any major returns on

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their capital.

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Everything is stacked against them,
starting with the fact that this is an

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dominated by large institutions, which
dedicate huge amounts of money both to

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the development of powerful tools and to
hiring the most skilled people.

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I will now take a very basic look at
some of the lesser known aspects of the

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current trading ecosystem, which may be
of some relevance as they can influence

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our trading approach.

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Financial Theories

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Economists have always had a special
interest in describing the behavior of

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financial markets in the most realistic
way possible, which has led to a series

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of theories being postulated for this
purpose.

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Based on the rationality or
irrationality of the agents, all the

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aimed at defending the efficiency or
inefficiency of the market with respect

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information with the ability to
influence the asset price, that which

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exists and that which will be generated.

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The first major accepted theory was the
efficient market hypothesis, after which

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a new way of thinking emerged, the
theory of behavioral finance.

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More recently, a new approach has been
postulated, the adaptive market

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hypothesis. I will try to explain the
most important points of each of them

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below. The efficient market hypothesis,
EMH, markets reflect all available

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information quickly and accurately.

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The efficient markets hypothesis is a
financial theory that argues that

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financial markets are efficient and
reflect all available information

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and accurately.

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This means that fundamental and
technical analysis are not useful tools

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taking profits over and above random
performance.

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However, some irrational behavior in the
markets, such as bubbles, cast doubt on

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the validity of this theory.

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Behavioral Finance, BF Theory Psychology
Affects the Behavior of Agents in

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Financial Markets Behavioral finance
theory focuses on the study of how

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psychology affects the behavior of
agents in financial markets and how the

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behavioral biases and cognitive
limitations of participants can lead to

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rational behavior that generates
inefficiencies in price formation.

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The Adaptive Market Hypothesis AMH
Market conditions are ever -changing.

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and rationality and irrationality
coexist.

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Finally, the adaptive markets hypothesis
is an approach that tries to reconcile

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insights from the efficient market
hypothesis with behavioral finance and

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psychology, and is based on the
evolution and adaptability of market

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Let's look in a bit more detail at the
adaptive markets hypothesis, since it is

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the fundamental theoretical basis on
which all the studies of the course are

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based.

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Presented by economist Andrew Lowe in
2004, this theory adopts a more holistic

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view of markets by trying to reconcile
insights from the efficient market

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hypothesis with behavioral finance and
psychology.

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It does not assume that the previous two
theories are wrong, but that they are

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incomplete.

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In the author's words, behavioral
anomalies and efficient markets are

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sides of the same coin. They reflect the
dual nature of human behavior.

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The fact is that sometimes we're
rational and sometimes we're emotional.

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Usually, we're a bit of both.

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This theory is based on the evolution
and adaptability of agents.

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It implies that behaviors are
constructed and shaped by the continuous

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interaction of the agent's own internal
reasoning, together with the external

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conditions of the current environment.

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This new approach is situated somewhere
between the two previous theories.

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The agent is not assumed to be rational
or irrational.

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Depending on market conditions, agents
will act in one way or another.

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In a stable environment, agents will act
more rationally, while in an unstable,

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volatile environment with excessive
uncertainty, different behavioral biases

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will be activated, leading them to act
more irrationally in order to overcome

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the challenges they face.

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This theory does not assume that the
market is either efficient or

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Rather, it depends on the moment due to
the flow of information and the

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importance of a changing environment.

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The theory is mainly supported by two
points.

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One, the efficiency of the market
depends on its conditions.

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The volatile characteristic is the
result of the interactions of the

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participants, which in turn depend on
the market conditions.

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Two, the agent is not fully rational and
is subject to cognitive biases.

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A purely rational model cannot be
applied since the participants form

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expectations based on different factors.

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Moreover, different expectations can be
created based on the same information,

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not to mention the fact that each agent
is risk -averse to a different degree.

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We are not all the same, nor do we react
in the same way.

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Moreover, the same person may react
differently to the same event depending

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the situation.

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It is also worth emphasizing that each
person behaves differently depending on

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their risk appetite, and the degree of
this will also be influenced to a great

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extent by the context of the market at
the time.

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The particular conditions of the market
and our own situation as traders all

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come into play here.

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Both evolve over time.

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Although the author refers to agents as
individuals, this is equally applicable

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to today's trading ecosystem.

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Regardless of the market participant and
the way in which they interact with the

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rest of the market, they will make their
decisions based on their assessments,

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motives, or needs at any given moment.

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And that particular moment will be
conditioned by different factors,

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that will change over time and therefore
lead to change in the assessments,

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motives, or needs of the participants.

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This hypothesis places more importance
on changing market conditions due to the

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emergence of new information.

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and how participants might react to
these.

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It focuses on the fact that rationality
and irrationality, efficiency and

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inefficiency, can coexist in the market
at the same time depending on the

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conditions.