Having the ability to analyze and gather data is vital in today's market. The main goal of a quantitative analyst is to use that data to predict future trends. To illustrate, if you want to know what will happen next, it's better to make a prediction rather than just guessing or basing your analysis on your personal bias.
So, how can you use analytics to predict markets' direction and financial results? Here are three tips.
A common question about using analytics is whether there is any value in looking at historical data. And the answer is yes. While a solid data set isn't necessarily needed to make reliable forecasts, it's still an effective tool to consider. Even though it's not relevant for analyzing the current trends, it can help provide insight into the long-term.
Look at the market cap and earnings of a stock before and after it rises. This can be done using the technology of trend following. Trend following gives you a snapshot of the behavior of a stock through time. From there, you can determine whether or not a stock has gotten overvalued or undervalued.
From your historical snapshot, identify the same stock. It's time to look at its behavior over time. During the initial upswing, see if the price is still higher than its previous low and if it's still moving upward.
Next, look at the same stock within a short period of time. If it moves out of the overbought range, then you can conclude that the stock is headed in the right direction. Similarly, if it moves out of the oversold range, then you can conclude that the stock is in a bearish trend.
Then, take a look at the last three months of the company's performance and determine if the stock has had a break-out or was seen as a non-bullish period. If it's bullish and moves higher, then you have a good chance of a big increase in the share price. If it's bearish and falls, then you have a much less likely chance of a big drop.
What you're basically looking for is a clear signal that the stock is on its way up. Ideally, you want a reliable indicator such as the MACD indicator, which contains a market ratio indicator, the moving average and the candlestick indicator. All of these indicators are based on fundamental analysis.
If the indicator indicates a support level, you can use a moving average to track the momentum. Take note of the stock's movement against this moving average.
Finally, you need to consider the candlestick indicator. To learn more about it, check out The Calculus of Wall Street.
By combining traditional tools with analytics, you can make more informed decisions in your trading decisions. Use your intuition and the combined knowledge from the three different analytics techniques to forecast future trends.