Words like “prediction” and “forecast” are often thrown around when trading on the stock market. Many believe that such a foretelling of the stock price of a company is possible based on data of its previous performance. However, the problem with ascertaining the future is that there are too many possibilities. Various models – quantitative and historical – have been used to predict stock prices, but all have failed in doing so successfully.

Moreover, instead of trying to fathom the mysteries of the future, traders should be concerned with becoming as profitable as possible. By obsessing over predictions, traders can often jeopardise their profits. Moving against the momentum with the expectation that the prices will change direction suddenly can cost traders because, more often than not, the stock price direction will not change.

The focus should be on the momentum

Keeping up with the momentum in which the whole market moves is regarded as the golden rule of trading in stocks. It is more important than the direction in which specific stocks are going. The overall momentum may be positive, but it may be pushing against the stocks of select sectors. For example, if interest rates are lowered, the banking and auto sectors will benefit and be in favourable momentum.

Trading is all about discipline

Before trading on the stock market, you should identify your profit targets, and adhere to them in a disciplined manner. Bear in mind that your risk-taking capacity is extremely limited and you should strictly trade within its confines. Taking a chance otherwise may seriously jeopardise your finances by causing massive losses.

Traders often enter the stock market with the intent of making short-term profits, but become inclined to think like long-term investors. This may compel them to alter their strategy because of the prospects of bigger profits in the future. Such afterthoughts lead to traders breaking discipline and may place them in a position where they take on more risk than they can handle.

Protect your capital

Picking up from what we said about discipline, it is imperative traders understand that at the heart of their activities on the stock market is the protection of their capital. Profits and losses are all part of the game, but your judgment should not stray when it comes to your capital. Strict limitations to loss of capital, whether specific to your trades or the days on which you are trading, are a good strategy to abide by. Your ability to predict stock prices will be of little use when the market turns against you. It is more important that you stick to your plan and are disciplined in your dealings.

Focus on what you can control

Forces far beyond your control run the market. These are the Reserve Bank of India’s (RBI) decisions on interest rates, inflation, fiscal deficit, the performance and stock prices of companies. These are impossible to control, but a prudent trader holds the reins of his or her plan for each eventuality. You buy during dips and sell during rises, based on the companies undertone, in a bullish market. You may also have a contingency plan for when the market forces outside your hand act. Beyond that, traders have no control.

Stock prices rarely move in straight lines

Traders may feel that stock prices will dart in the anticipated direction in a straight line. However, statistically, this is rarely ever true. A large volume of securities being traded the world over, when assessed with time variables, will reveal that taking a position before a move is unlikely. It is better for traders to trade in averages and based on the direction of price movements and market momentum. Fixating on a particular stock is not a sustainable strategy.

Vague plans rarely work

Predictions tend to make novice traders believe that once the share prices rise, they can make the most of it by reaching the peak and then selling their shares for the maximum profit. Such a plan rarely works in reality. For this reason, traders should chart out a plan for entering and exiting all trades with a well-defined stop-loss order, irrespective of whether they lead to a profit or loss.

Alternatives

Instead of predicting stock markets, traders can keep in mind other factors in order to maximise their gains.

Prices move in waves

As mentioned earlier, prices don’t move in straight lines, but in waves. So, even if stock prices fall momentarily, traders must hold on to their positions unless the overall trend begins to seem unfavourable. Regardless, traders should have an exit point in place. Those looking to make short-term trades can take advantage of these waves, provided that they are not encumbered by direction.

Support and resistance levels

A support level is the price level below which an asset does not fall over a time period and a resistance level refers to the price at which it encounters pressure on rising as a large number of traders are wishing to sell at that price. As opposed to predicting if support and resistance levels will break, thereby leading up to a substantial breakout, traders should be focused on what happens around these levels. In case a breakout does take place, traders should trade in the direction the prices assume.

What you buy

Among the things that are in an investor’s control is the stocks they choose to buy. The fundamentals of the business and its performance dictate the sale of its stock. The number of shares bought, depending on the risk of concentration and diversification of portfolio, is also an important factor in investment. Finally, the price of the share determines what profit you can sell it at. This should be an important factor in the purchase of shares.

Conclusion

The “prediction” of stock movements entails the correct forecast of not only prices, but all other factors affecting stock prices. The reaction of the majority of investors, natural calamities, geopolitical developments, scams, and exchange rates, among countless other factors, must be accurately assessed in order to make a prediction. Since these are very difficult to gauge, the prediction of stock markets becomes a fool’s errand if the trader does not focus on protecting his capital and trading in a disciplined manner.