Financial markets are a living organism. They change, adapt, and respond to external factors, like an ecosystem in nature. This is the essence of the Adaptive Markets Hypothesis (AMH), developed by economist Andrew Lo.

It challenges the classical Efficient Market Hypothesis (EMH), which states that prices always fully reflect all available information, and it is impossible to profit from systematic anomalies. The Adaptive Markets Hypothesis says: 'The market is not static. It constantly evolves, and its participants learn, adapt, and change their behavior.'

What does this mean in practice?

Where did this idea even come from?

In the 1970s, the idea of an efficient market prevailed. They said that no indicators, technical analysis, or news would give you an advantage because everything is already factored into the price.

But if the market is so efficient, why do Buffetts, Soroses, and other market wizards exist who consistently earn over decades? Why do strategies that work at one time stop working at another? Why can even a simple piece of news cause a sharp price spike, even though it should have already been accounted for by the market?

Andrew Lo wondered: what if the market behaves not like a machine, but like a living organism? People learn, change their behavior, and try new things. Some win, some lose, but in the end, the market adapts to changes.

Thus, the Adaptive Markets Hypothesis was born.

How does the adaptive market work?

Imagine you are trading in the market. You have a strategy, for example, you buy breakouts of levels. As long as it works, you continue, but as soon as everyone starts doing the same, the effectiveness of the strategy declines – the market adapts.

It's all about behavioral evolution:

Markets consist of people (and algorithms), and they learn. If something works, more and more traders start using it → the effect disappears.

Competition changes the game. If there were a strategy that guaranteed 100% profit, it would quickly be exposed and neutralized.

Markets are not always rational. Panic, greed, fear – all of this creates instability. In moments of crises and bubbles, the market behaves chaotically, and effectiveness takes a back seat.

Everything is cyclical. Some strategies stop working, new ones emerge, but then the old ones can earn again – in a changed form.

In other words, the market is evolution, not a static system.

Practical application of the hypothesis.

Okay, we understood the theory, but what to do with it?

Strategies need to change.

If you have found a working strategy, it doesn't mean it will work forever. Always monitor its results and adapt it to new conditions.

Example: in the 2000s, arbitrage trades on crypto exchanges were a gold mine – price differences between exchanges reached 10-20%. But today, the difference is minimal, and arbitrage has become less profitable.

There is no universal rule.

Forget ideas like 'always buy on a dip' or 'don't go against the trend.' They may work in one market and not in another.

Example: in a sideways market, support and resistance levels work excellently. But in a trending market, they will be broken time and again.

Emotions are an important part of the game.

If the market were purely rational, there would be no bubbles, crashes, pumps, or dumps. But people are prone to emotions, and this creates temporary inefficiencies that can be profited from.

Example: during news events, many make emotional trades. Often the first impulse is false, followed by a reversal. This can be used in your trading.

Fundamentals and psychology affect the market.

Technical analysis is great, but context is also important. When economic conditions change, the market adapts.

The Adaptive Markets Hypothesis tells us: forget fixed rules and look for patterns that work here and now.

There are no eternal strategies – everything becomes outdated. People learn, the market changes, and thus you must adapt too.

Those who understand crowd behavior can find good entry points.

Sometimes the market is rational, sometimes it's not. In moments of chaos, one can seek super-profits.

Trading is not just a set of rules. It's a survival game in a constantly changing environment. Those who can adapt survive.

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