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

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

equity market
Published Date: 08 Feb 2024Updated Date: 10 Jan 20256 mins readBy MOFSL
Stock market

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.

Open Your free Demat Account in just 5 minutes!

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.

 

Financial Calculators: Compound Interest Calculator | EMI Calculator | SIP Calculator | SWP Calculator | RD Calculator | NPS Calculator | PPF Calculator | Mutual Fund Returns Calculator | Inflation Calculator | Option Value Calculator

 

Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price

 

You may also like…

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C