Researchers like to predict the direction of the stock market, be it financial or technical. One asks himself: Is the stock market predictable? While the forecast doesn't work in the long term, it does work in the short term.

You can also use it to forecast the stock market.

1.     Power

As the saying goes, "don't hit the tape". Based on this widely cited financial wisdom, investors are advised not to get in the way of the market. Based on this belief, market development is considered to be the best direction. The origins of this concept can be traced back to behavioral finance. Investors may be wondering why they should put their money in stocks that are going down rather than those that are going up, especially when there are so many options. This is a classic example of fear and greed. There is a lot to be said about the dynamics of deciding whether to invest or not. Honestly, it's a self-reinforcing cycle.

2. Market corrections

Seasoned investors who have been through the market's numerous ups and downs often believe that the market will eventually balance itself. High market prices have traditionally discouraged these investors from investing, but historically low valuations may present investment opportunities.

Mean reversion is when the trend of a variable, such as a stock value, reverts to its mean value over time. Many important economic indicators such as GDP growth, interest rates and unemployment have been found to show what is happening. Mean reversion can also explain trade flows.

3. Martingale

It is also possible that previous results are not important at all. A martingale is a mathematical sequence in which the current number is the best predictor of the number that follows. In probability theory, this idea is used to evaluate the outcome of random moves.

It can be assumed that stock market returns are martingales in the pricing of stock options. According to this concept, the value of an option is determined neither by past price developments nor by predictions of future price developments. The only stock-specific parameters are the current stock price and expected volatility.

The Bottom Line.

Despite decades of research by some of the world's greatest financial experts, there is still no clear solution. In conclusion, there may be short-term momentum effects and weaker long-term mean-reversion effects; however, you cannot rely solely on them. Answer the question: Can the stock market be predicted? No, not predictable