We've all seen interviews with people on various financial media outlets telling you where they believe the stock market is headed in the future. Of course, we want to believe their financial forecasts. It is a comforting thought to entertain: someone might know the true answer to the future price of a stock or the market's next movements. But do these so-called "experts" really know where the stock market is headed?
Stock market forecasting is the practice of using past market data and various analytical techniques to predict future stock prices. Despite the prevalence of stock market forecasting, many experts argue that it is an inherently flawed practice and does not work as advertised.
- The Market is Unpredictable
One of the main reasons stock market forecasting does not work is that the stock market is inherently unpredictable. In one study called, "Deep Learning for Stock Market Prediction" published by the National Center for Biotechnology Information, it was found that stock prices are affected by a wide range of factors, many of which are difficult to predict. For example, stock prices can be affected by changes in government policies, economic conditions, and even natural disasters. Because it is impossible to predict all of these factors, it is impossible to accurately predict future stock prices.
- Unreliable Data
Another reason stock market forecasting does not work is that it is often based on unreliable data. In a paper titled "Enhancement of stock market forecasting using an improved fundamental analysis-based approach," it was noted that many investors fail to consider all of the relevant factors that can impact stock prices and that many of the methods used for forecasting stock market prices are unreliable. For example, some investors rely on a mix of historical stock market data and technical analysis to predict stock prices, but these methods do not account for all of the factors that can impact stock prices, such as company-specific news, or global political and macroeconomic events.
- Accurate Predictions Are Difficult
A third reason that stock market forecasting is not accurate is that even if you have good data, it is difficult to turn that into accurate predictions. The stock market is complex and dynamic, and it's difficult to capture all the important factors that affect stock prices. Not only that, even if one can capture all the various factors, it's still difficult to predict how they will actually interact with each other and affect prices. This is because stock prices depend on many variables, some of which are known and some of which are not. Also, the relationship between these variables is often non-linear and difficult to model, thus making it hard to create accurate predictions.
- Unclear Actionable Ideas
Lastly, even when the predictions are accurate, it's not always clear what to do with that information. For example, a prediction of future stock price doesn't tell an investor when to buy or sell, or how much to invest. Even if someone could predict stock prices with a high degree of accuracy, it's still difficult to determine when the prices will reach the predicted level or whether they will go beyond that level. Thus, even if you can predict stock prices, you may not be able to make any useful investment decisions based on that valuable information.
In conclusion, stock market forecasting is a complex and difficult task that is prone to errors. The stock market is inherently unpredictable, and it is difficult to account for all of the factors that can impact stock prices. Additionally, even if you have good data, it's hard to turn that into accurate predictions. Even if you can predict stock prices with a high degree of accuracy, it may not be clear what to do with that information to make investment decisions. Therefore, stock market forecasting is not a reliable way to predict future stock prices and investors should be aware of its limitations when making investment decisions.