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The folly of fortune telling Why should you avoid predicting stock prices

08 Feb 2024

Introduction:

If you ask ten random stock market traders the reason for their financial losses, probably eight or even nine would attribute it to the inaccuracies in their price predictions. However, a fundamental question remains: Is it genuinely possible to predict stock prices, and should traders try to do the same?

In the ever-volatile world of equity markets, traders often find themselves tempted by the allure of predicting stock prices. They may look to foresee market movements and capitalise on them, but attempting to predict stock prices can be a risky venture. Since stocks typically follow a sequence of random fluctuations, asserting the ability to predict them might seem audacious.

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In this article, you will explore why you should refrain from predicting stock prices and instead focus on adequate risk management, informed decision-making, and a disciplined approach to trading.

1. Stock markets are complex and highly unpredictable

Stock markets are complex and tough to understand. Many factors influence them, including geopolitical events, economic indicators, government policies, and investor sentiments. Attempting to predict how these elements will interact and impact the stock prices with absolute certainty is next to impossible. The dynamic and unpredictable nature of the stock markets makes it nearly impractical to consistently predict price movements accurately.

2. No one can catch the highs and lows of the markets

While the concept of buying low and selling high seems appealing in theory, achieving consistent success in practice has yet to be discovered for even the most seasoned traders. Various stocks exhibit unique reactions to the same stimuli at different junctures, making the strategy challenging to implement reliably. Consequently, it’s advisable to avoid trying to predict the markets to buy at the lowest point and sell at the highest point.

3. Random factors and noise around a stock can impact its price

Apart from the ones mentioned in the first point above, several random factors and uncalled noise around a stock can also impact its price. For example, news headlines, social media trends, or sudden market occurrences can create noise that obscures stock prices. Traders trying to predict them may fall victim to sudden price fluctuations, leading to misguided decisions and subsequent unwarranted financial losses. Hence, they must make trading decisions based on meaningful technical analysis and market signals rather than the noise around the stock.

4. Lack of information and asymmetry

Adequate information about the stock is essential for predicting its short-term price movements. However, you may not have access to all the information at a given time. Even traders with access to extensive data and advanced analytical tools work with limited details about the stocks. This lack of complete and equal information about the stock further makes it difficult to precisely predict its price movements.

5. Several unforeseen factors can play a role

Several unforeseen factors can cause volatility in the overall market or specific stocks. Humans can never predict these factors in advance. For example, factors such as natural disasters, pandemics, etc., can harm the stock markets, and no one can ever predict them with certainty. Suppose you enter a position estimating that the market will rise, but suddenly, a disaster occurs, and the market falls. You may incur huge financial losses and be demotivated to reinvest in the future.

6. Focus on the market momentum rather than the direction

The golden rule of stock trading is to focus on taking advantage of the market momentum rather than trying to predict the direction. Bulls and bears are the two sides of the same coin, and both are equally significant in the world of stock trading. Some days, you will witness a strong bullish momentum, while on other days, you will witness the bears taking control of the market. Try to gain from both positions by devising appropriate trading strategies with suitable entry and exit points.

To conclude

In the dynamic and fast-paced world of equity markets, predicting stock prices may seem enticing, but it is fraught with risks. As a trader, you must focus on adequate risk management, informed decision-making, and a disciplined investment approach for more favourable results. You can look to take advantage of the market momentum rather than trying to predict the direction.

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 

 

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