Financial Market Trends: 4 Tips to Predict Them

How to Predict Financial Market Trends? This is a question that trading beginners ask themselves (experts should already have an idea about it). The issue is more complex than one might think. Firstly, because predicting prices allows for more effective trading and ensures consistently good profits. Secondly, because the concept of prediction in finance should be taken with a grain of salt. Certainly, its meaning has little to do with what the collective imagination or simple Italian language suggests. In the following article, we clarify the concept of predicting financial market trends and provide some tips on how to do it effectively, with a good probability of success and without exposing oneself too much to typical market risks.

Can the Market Be Predicted?

Actually, this is the first question to ask. And the answer is... Yes and no. Certainly, if the concept of prediction is understood in the common sense, it is not possible to predict the market. Knowing with certainty the future of prices, whether near or distant, is absolutely impossible. No one has a crystal ball, not even the great gurus who have made millions with trading. But science doesn't come to the rescue either. This is because, upon closer inspection, trading and particularly Forex Trading is not an exact science. Of course, there are elements of scientific nature, and they should be integrated into one's investment activity, but this "boils down" to statistics. When reasoning about the future of prices, an estimate is produced, not an incontrovertible fact. However, this might be enough for those who intend to engage in rational trading and generate more or less stable profits. Science, the real one, which produces certain and replicable results, is another matter. And, of course, there is no trick or magical technique that can allow the trader to overcome this limit, which is, to all intents and purposes, objective and insurmountable. But the trend of financial markets is "scientifically" unpredictable for another reason, perhaps more prosaic and, for some, romantic. The market is made up of people, determined by people, and directly influenced by people. And human beings, it is well established, are rational but also terribly emotional. Certainly, trading is partially dominated by technology, but software is still required to read human behaviors and, ultimately, is calibrated on the latter, so even by inserting the technological element, we return to square one. The profound humanity of the market is a fact, detectable both through proper study and everyone's experience, whether they are traders or not. The expression "panic in the markets" is not purely literary and is not even exaggerated. It simply indicates a state of affairs that occurs more often than one might think. In this case, let's be clear, the investor is not to be blamed. Emotions in trading are a natural and physiological component, since money is at stake. And it is no coincidence that a good part of the literature on trading investigates precisely the psychological element. Finally, there is another reason why the market is objectively and scientifically unpredictable: complexity. It may seem a trivial point, but it is not at all. This is because if one investigates the context, one discovers that the elements of complexity are greater than one might have expected. The complexity of financial markets is particularly the result of the abundance of financial instruments. It is possible to trade with a huge number of stocks, indices, commodities, currency pairs, etc. Not to mention derivative instruments, such as CFDs and futures. Each of these assets is dominated by precise dynamics and requires study and dedication to be mastered effectively. However, complexity is also a matter of people. The number of traders is enormous nowadays, and the number of types of traders is also high. Retail, commercial, institutional... There are participants of all kinds. And each is driven by different goals and has different means at their disposal to achieve them.

What Can Be Predicted in Financial Markets

So should the topic of prediction be set aside? Of course not. It is sufficient to adopt the alternative meaning of prediction and simply apply it to the context of trading. Therefore, if by prediction we do not mean acquiring certain information about the future, but developing estimates with a certain margin of error, the discourse changes radically and... Yes, it is possible to predict the market. But what specifically? Trend. It is possible to develop estimates with a fairly narrow margin of error about the direction prices will take in the near future. We can say that outlooks, certainly with an ever-increasing risk of error, can cover even a three-year period. Obviously, the more the field is narrowed (excluding volatility), the greater the probability that the estimates will prove to be accurate. After all, this is one of the tasks that the trader must perform almost daily, or at least regularly if their time horizon is broad: estimate, or at least intuit, the direction in which prices will move. Let's be clear, it is not at all simple, but it is still possible. Trend reversal. The trader makes money by following the trend, of course, but also by exploiting trend reversals and the consequent rebounds. In fact, it is a very profitable method. Also very difficult, let's be clear: understanding if and when the trend will change direction is no easy game. Fortunately, it is absolutely possible, if one renounces the concept of certainty and accepts that of estimation, probability, and margin of error. The very structure of financial markets and the dynamics to which they are subject allow for a rough estimate of when prices will do an about-face. The market itself gives signals in this regard. It is up to the trader to grasp them, read them correctly, and act accordingly.

How to Predict Financial Market Trends

The question of "how" is the most complicated of all. If it weren't, making money with online trading would be really simple and everyone would be raking it in. We are, however, in the field of difficulty. Fortunately, with a certain amount of commitment, everything is possible. It is truly possible to "predict" (according to the meaning we provided in the previous paragraph) the trend of financial markets. Here are 4 tips for doing it effectively.

The 4 Types of Analysis

The first tip is to practice good and complete analysis activity. That is, to use all four types of analysis available to the trader. Technical analysis. It is the queen of analyses. It allows estimating price direction, reversal points, etc. by studying, precisely, prices and volumes. It is based on precise statistical models, which in turn represent the core of the main technical analysis tools: indicators and oscillators. Chart analysis. Actually, it is a branch of technical analysis. The focus is always on the charts, but the method of analysis changes radically. In fact, the tools to be used are not the classic indicators and oscillators but... Candles. Exactly, candles can form figures, which turn into signals and thus announce the continuation of the trend, its reversal, etc. Fundamental analysis. It is the "external use" counterpart of technical analysis. If technical analysis provides info on the future of prices through the study of the market, fundamental analysis does so but through the study of the economic and political environment. The underlying thesis, moreover amply demonstrated, suggests that some events are capable of impacting prices, and they all do so more or less in the same way. Sentiment analysis. It is the study of traders' perceptions and beliefs. These reveal investment intentions and, in a sense, also guide them, precisely because of the individual's instinct to follow the crowd. It is very complicated and its results are more difficult to read; certainly, they have a lower degree of detail.

The Issue of Complexity

The second tip is to pay close attention to the complexity-simplicity issue. This is also because there is often a distortion, which - it must be said - is mainly carried out by inexperienced traders. This distortion consists of the belief that, when it comes to technical analysis, complexity is synonymous with effectiveness. Those who reason in this way use many indicators, dedicating a lot of time to technical analysis, perhaps too much. Well, this belief is generally false. It is not true that complexity equals effectiveness. In fact, the opposite is true. Those who use many indicators, in fact, derive a distorted image of the market, in the worst case simply contradictory. Of course, they come out of the analysis dazed and with ideas more confused than before. The advice, therefore, is to choose a few indicators, but to choose them well, with knowledge of the case, as we will explain in the next paragraph.

Proofs and Counterproofs

This is exactly the principle that should drive the trader in choosing indicators but also in their subsequent use. A couple of indicators are enough. It is necessary, however, that one can confirm the other, and together they can verify the accuracy of the signals or confute them. Obviously, it is good to remember, we are talking about estimates, probabilities, statistics. As amply explained in the previous paragraphs, the concept of certainty is foreign to trading. Generally, it would be great to use a price indicator and a volume indicator. In fact, if put in relation, they can guarantee a useful proof-counterproof dynamic to provide a reliable orientation and lay the foundation for an analysis that comes close to reality.

The Emotional Issue

The issue of emotions and the psychological sphere is a controversial one. It plays the role of the classic dust under the rug or, if you prefer, the elephant in the room. Although denied by most, the emotional-psychological issue is very important and even capable of profoundly impacting trading activity. The truth is that the trader is a human being, regardless of their skills, and as such is subject to emotional pressures, especially when the stakes are high. And, upon closer inspection, the stakes are always high. Therefore, the trader is subject to emotions. This is a serious problem, as emotions can compromise lucidity. In fact, they definitely compromise the ability to judge and analyze. Therefore, they are enemies of analysis. The advice, then, is to produce analysis in a serene context, without haste, in order to escape the emotional wave that often involves trading activity. Emotions, perceptions, sensations, and intuitions must stay out of the analysis activity. This is also because improvisation is the surest approach to losing capital.