The investment in stock market is done to get the benefit of the future price action. However it has been witnessed over the period of time that one cannot predict the stock market exactly or precisely instead it is just you can make some analysis on the previous data or apply some charting technique to find out the probability of the profitable trade.
There are various methods which are being used to forecast the future price movement classified as follows:
Technical Analysis (TA) basically deals with the reading & analyzing of the historical data to forecast the upcoming price movement classified as trends technically.There is various tools & indicators which are used in combination to find out the particular trend in the stock or security.
The trends are described as:
Bull Trend: When the price is making new higher highs and new higher lows. It is advisable to buy during these phase as the prices are expected to rise in the future. The time frame may vary ranging from intraday to weeks or months.
Bear Trend: When the price is making new lower highs and new lower lows. This is the selling opportunity in the market where one can gain the profit by shorting the security or share.
Range bound Trend: When the price is moving between price ranges where lows and highs are moving in a specified range of values for a period of time. In this phase it is recommended to buy at the support and sell at the resistance level as prices will move in these levels only.
Apart from that analyst also study some important chart or price patterns such that Head & Shoulder, Cup & handle, Flag, Double top or bottom which provide significant price information.
Fundamental Analysis is basically carried out to find the intrinsic value of the securities by analyzing financial and economic scenario .The data comprises company financial report which in turn involves reading, analyzing & comparing the financial statements i.e balance sheet, profit & loss & cash flow statement. There are various valuation techniques which are being deployed to find out the value for e.g Dividend Discount Model (DDM), Relative & (Discounted cash flow) DCF valuation.
Quantitative or Machine Learning:
This technique involves software generated algorithm and data mining tools which helps in predicting the future price movement. The computer based algorithms which on the bases of some mathematics logic study the relation between volumes and prices one aspect of the other combinations. The calculations are based on certain pattern and behavior and the relationship between them as a mathematical function.
However it is best to gauge the risk- return of your investment and work towards a more profitable trade probability. Lately the third way of trading is becoming more popular as human sentiments also play the major role in performance of stock market like over reaction, over confidence, fear & greed which sometime dominate the rationale of trading and deviate from the efficient market hypothesis.
In nut shell it can be stated that that there is no clear approach to predict the market as it is not just numbers however the human behavior is also involved which is very difficult to predict .However still there are tools and techniques which can be used to find the next possible probability of price direction. So to invest or trade in market you should first know what the best strategy is or study which will suits to your style of trading in stock market.