{"id":89,"date":"2019-03-21T05:55:34","date_gmt":"2019-03-21T05:55:34","guid":{"rendered":"http:\/\/algotrading101.com\/wiki\/?p=89"},"modified":"2019-04-11T13:31:42","modified_gmt":"2019-04-11T13:31:42","slug":"market-inefficiency","status":"publish","type":"post","link":"https:\/\/algotrading101.com\/wiki\/market-inefficiency\/","title":{"rendered":"Market Inefficiency"},"content":{"rendered":"\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>Definition<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<p class=\"wp-block-paragraph\">A market is said to be inefficient when it provides consistent opportunities for profits.<\/p>\n\n\n\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>Examples<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<ul class=\"wp-block-list\"><li>When an asset is trading at different prices on 2 exchanges, that is a market inefficiency.<\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li>When you are able to use satellite images of corn market to predict future harvests, that is a market inefficiency. <\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li>When you can find order patterns to tell when a bank needs to buy an unusually large amount of Apple stocks today, that is a market inefficiency.<\/li><\/ul>\n\n\n\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>Description<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Difference between Market Inefficiencies and Luck<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In a game of blackjack, making money in one hand does not mean you have found a consistent way to make money. You might lose more in the next 3 hands.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Similarly, making money off one trade does not mean you have found a market inefficiency.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Checking for Market Inefficiency<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">There are 2 ways to check if you have found a market inefficiency.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><u>Method 1) Break it down to first principles<\/u><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This means to question your decision until you reach the base rationale\/assumption. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Our aim is to find a clear cause and effect. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If X happens, Y should happen. If Y doesn&#8217;t happen, we do Z to profit.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><u>Method 2) Make consistent profits<\/u><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">When you cannot identify a clear cause and effect because there is too much uncertainty, use consistent good performances as an indication of market inefficiencies.<\/p>\n\n\n\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong> Links to Complicated Explanations<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<ul class=\"wp-block-list\"><li><a href=\"https:\/\/www.investopedia.com\/terms\/i\/inefficientmarket.asp\" rel=\"nofollow noopener noreferrer\" target=\"_blank\">Inefficient Market &#8211; Investopedia<\/a><\/li><li><a href=\"https:\/\/en.wikipedia.org\/wiki\/Market_anomaly\" rel=\"nofollow noopener noreferrer\" target=\"_blank\">Market Anomaly &#8211; Wikipedia<\/a><\/li><\/ul>\n\n\n\n<p class=\"has-medium-font-size wp-block-paragraph\"><strong>Related Terms<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator\"\/>\n\n\n\n<ul class=\"wp-block-list\"><li><a href=\"https:\/\/algotrading101.com\/wiki\/trading\/\">Trading<\/a><\/li><li><a href=\"https:\/\/algotrading101.com\/wiki\/algorithmic-trading-strategies\/\">Algorithmic Trading Strategies<\/a><\/li><li>Cryptocurrency<\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Definition A market is said to be inefficient when it provides consistent opportunities for profits. Examples When an asset is trading at different prices on 2 exchanges, that is a market inefficiency. When you are able to use satellite images of corn market to predict future harvests, that is a market inefficiency. When you can [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_links_to":"","_links_to_target":"","footnotes":""},"categories":[2],"tags":[],"class_list":["post-89","post","type-post","status-publish","format-standard","hentry","category-finance-resources"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.7 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Market Inefficiency Simplified - AlgoTrading101 Wiki<\/title>\n<meta name=\"description\" content=\"Quantitative Finance - Explain Like I&#039;m Five\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"http:\/\/algotrading101.com\/wiki\/market-inefficiency\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Market Inefficiency Simplified - 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