Stock Forecast Methods

Stock Market Trading and Investing

Pattern Prediction Worked This Time – Is Stock Market Predictive?

The last two-week prediction using pattern similarity was pretty good:

Pattern Prediction Worked This Time - Is Stock Market Predictive

The question is if we can trust and use the only one such prediction for investing. Pattern recognition system is based on the statistical classification of patterns assuming that the patterns are generated by a probabilistic system. “Probabilistic” means that sometimes an expected thing happens, sometimes does not. Yes, some patterns can be repeatable in the future, therefore, the selected present patterns can be used to predict the future pattern. However, statistics evidence that the prediction can be wrong.

Basically, average stock prices are almost continuous function of fundamentals. The stock market performance depends on the strength of the companies and the economy as a whole. Such things are quite transparent and predictive to a certain extend. Least predictive factors (noise) are natural disaster,
political event, published news, investors’ psychological reaction to news or event, etc.

If we try to calculate the value of “patterns” predictive factor, it might be a relatively small amount – around 20-40%. So that it is wise to analyze information from multiple sources to make a more comprehensive conclusion. There is always a risk involved in stock investing. In fact, historically a stock market crash is a result of combination of all factors – short, medium, and long terms, predictive and non-predictive. “Non-predictive” means – there is no way to know for sure about this in advance.

© Alex Shmatov. Published with permission of the copyright owner. Further reproduction strictly prohibited without permission.

August 28, 2010 - Posted by | Stock Market Forecast | , , , , , ,

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