4 Strategies in Prediction of Stock Market

You might have come across people who made huge profits by investing in stocks alone. Though sometimes it may be just their sheer luck, it is not the case always. They are able to position their trades better and, more importantly, know the price of the equity is going up or down.

There are techniques and tips available to predict the performance of a stock. But you must understand that it's not an easy bet. Just knowing the analysis techniques is not enough. Instead, you must acquire the skills by experimenting with them in the real world.Even after acquiring the desired skills, it is not a guarantee that your prediction will always be right. The investor's aim must be to get it right for most of the stock he has invested in , or that may provide him with a sufficient profit margin.

Let’s look at 4 analysis strategies widely used to predict stock price movement:

1. Intrinsic Value Analysis

Also known as fundamental analysis, it involves analysing a stock for whether it is undervalued or overvalued by analysing the various economic and financial factors that affect the value of a stock market . It studies the overall state of the economy, the industry's future growth potential, and other company-specific data such as revenue figures, return on equity, and other crucial figures in the company's financial statements. If a stock is undervalued, it is recommended to buy it and vice versa.

2. Watch For Breakouts

When a stock is traded in high volumes, which may be nearly 40% or above its normal average trade for the last 40-50 session, a breakout can be identified for that stock. If the fundamentals, market uptrend, and other factors are constant, these stocks may potentially generate good returns. On the other hand, if the breakout is in weak volumes, it is not a good sign and time to consider selling out these stocks.

3. Moving Averages

A simple moving average (SMA) and Exponential moving average (EMA) are popular indicators to identify trend direction. Though both SMA and EMA average out the price fluctuations over a period( 10 days, 30 minutes, 10 weeks, etc.), EMA is more sensitive to price changes than SMA as it gives additional weightage to recent prices. A price crossover(when price crosses above or below SMA or EMA) is generally observed to predict a change in price trends.

4. Derivatives Data

Derivatives data, which consists of huge historical data, is also used for predicting the stock price movements. Acquiring the data is not enough alone for a meaningful prediction. The real skill lies in being able to decode it and derive useful information out of it first. Also, derivative structures must be used along with fundamental and technical analysis to make effective predictions.Though the above analysis techniques can guide you in predicting stock price movements, the human element largely affects the prediction outcomes. Since every human being is different in their way of looking at and analysing the same set of data, conclusions drawn may differ from person to person.Follow a strategy that aligns with your trading style. Most importantly, minimise your losses if your prediction doesn't go right by putting stop-loss or trailing stop-loss on your trades. Lastly, practice extensively with smaller trades to get better at it before you move on to the big trades.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.