Problems with Predicting Stock Market Trends Using Historic Data

Many investors believe that the historical market performance is the best indicator of future market trends. The basic assumption is that the ‘market works in cycles’. Going by this, we should be able to predict future trends by analyzing past trends.

Although the above said assumption regarding market cycles is generally accepted by all kinds of investors, the prediction of trends using historical data is challenged on many counts.

One of the main reasons behind these ‘prediction failures’ is the abundance of technology stocks in today’s market. Ten or twenty years ago, there were not many technology-based or technology-driven companies there.

Other reasons include:

High co-ordination and correlation of domestic and foreign markets. Technology has made it possible to arbitrate any price difference between markets and products. Globalization has also contributed to this international liquidity. So the trend is now more global than local.

Introduction and popularization of new trading instruments and strategies. New products like Exchange Traded Funds (ETFs) for almost all financial instruments have made investing easier and less risky. The advance in technology has given rise to advanced trading systems supporting automated trading and complex trading strategies, especially for options trading.

There was no such liquidity of day trading available ten years back. Today, day traders, because of their number, position, size and number of trades can control and enhance intraday and inter-day prices.

A decade earlier, it was hard for an investor to quickly analyze an opportunity and execute trades before the opportunity was lost. But today’s trading systems, steaming quotes and news flow have made both fundamental and technical analysis fast and easy.

Another major difference is the investor money invested in funds. Today a lot of money is invested in pension, mutual and foreign investment funds.

The silver lining is that once you identify the differences of past and present markets and realize market sentiment, you have a better chance of predicting the trends. Moreover, unlike in the past, you are provided with many state-of-the-art tools to analyze everything. Following the right strategies at the right time can still make investing profitable.

NobleTrading is one of the leading Online Commodity Brokers offering direct access to most commodity futures markets. Moreover NobleTrading offer many different account features for Futures Day Trading.