It seems the stock market movement is unpredictable, as sometimes the market opens lower, sometimes in a positive zone and sometimes it remains flat with no significant movement. It can move in any direction depending on the sentiment of the people that keeps changing as per the various factors like economic activities, fundamental factors and technical aspects.
Also Read: What to Know Before Investing in Stocks: 10 Things to Consider
Using certain parameters you can predict the stock market movement for the next day. Not exactly but with the help of these parameters you can predict the trend up to some extent or can get the cues in which direction it can move for upcoming trading sessions. Here we are going to discuss about the important parameters that you can use for stock market prediction.
Parameters for Stock Market Prediction
Basically, there are two types of approaches – fundamental analysis and technical analysis that are considered while predicting the stock market movement. The former one will help you to analyse the fundamental factors that can influence the market movement. And, the latter one will indicate to you the sentiment of the market using certain technical indicators. Let's talk about both the parameters in more detail and how you can utilize them.
Fundamental Analysis
In fundamental analysis, various fundamental factors are analysed to find out the real value of the stock. These factors are like analysing the financial condition, revenue and net earnings performance of the company to find out its intrinsic value.
Apart from this, you also need to analyse the future prospects of the company, external factors and economic activities that can affect the growth of the company. You also need to consider the industry growth and regulatory actions by the government and management of the company.
Also Read: Why is Fundamental Analysis Important for Investing in Stocks
In fundamental analysis, you can use a top-to-bottom or bottom-to-top approach to analyse these factors. In the previous one, you have to first start analysing global factors to economic conditions, then sector or industry trends and lastly the growth and performance of the company.
In the latter approach, you have to start with company analysis, then external factors like industry or sector performance and in the last the economic activities and global factors. In both types of approaches, you have to use the same common parameters.
Parameters Used in Fundamental Analysis:
In fundamental analysis, the parameters that are used are financial ratios will tell you the financial health of the company. These financial ratios will also help you to compare with other peer group companies, and analyse whether the share price is undervalued or overvalued. Below you can find out the top parameters used to analyse the fundamental factors of the company and predict the movement of the stocks in the market.
Also Read: How to Find or Determine Undervalued Stocks: 10 Best Ways
Earnings Per Share (EPS)
This ratio shows the net earnings of the company for each shareholder in a particular period, which is usually counted for one financial year. To calculate the EPS you can divide the net profit of the company by a total number of outstanding shares in the market.
The higher the EPS, the higher the average EPS of the industry means the company is performing better than its peer group companies. If you see a constant growth in EPS, you can expect the share price of the company will also grow in the near future with better scope and growth opportunities for the shareholders in terms of growth in their wealth.
Price to Earnings Ratio
This is one of the most important and true indicators that will tell you if the stock is overvalued or undervalued. And you can use this ratio to predict the stock market movement for the coming period. This is calculated by dividing the current market share price of the company by the EPS of the company.
If the PE ratio of the company is much lower compared to peer group companies, then there is scope for a rise in the share price of the company. While, if the PE is higher, it means the stock is expensive or trading at a higher price and it can fall down in the near future. Analysing the PE of the entire market or broader market indices you can predict the direction of the market.
Price to Earnings to Growth Ratio
In addition to the PE ratio, the price-to-earnings-to-growth ratio is another important parameter you can use to predict the movement of individual stocks or main indices. Compared to PE, this ratio provides a better benchmark to measure the performance of the company.
Also Read: Things to Consider Before Buying Stocks for Long Term: 10 points
The ratios are considered to analyse the earning growth of the company and based on this you can predict the share price movement of the company or the main indices indicating the market with better visibility as per the earning growth.
Price to Book Value Ratio
This is another important ratio that helps you to know the book value of the company. The book value is the minimum or you can say the real value of the company that can be counted at the time of valuation of the company. The price-to-book value ratio will help you to know the growth potential of the company in the industry.
To calculate this ratio, simply divide the market price of the share by the book value of the shares. And to know the book value of a company you have to deduct the book value of liabilities from the book value of the assets. If the price-to-book value ratio is low, it means the stock is undervalued and has the potential to move upwards in the near future.
Parameters Used in Technical Analysis:
It is the process of analysing the movement of the share price of the company using various technical indicators and other parameters. Based on the previous and current pattern in share price movement you can predict the movement of the stock for the next day. In this type of analysis, you can use various parameters to predict the market direction.
Candlestick Chart Patterns
You can see the stock price movement with a simple line chart that can show you the trend by joining all the closing prices of the stock. However, there are more comprehensive types of chart patterns that can give you better insight into the stock price movement.
The candlestick chart patterns are one the most famous types of chart used by the most of the traders to analyse the stock price movement and predict the direction. To draw a candle you need an opening price and a closing price with the high and low of the day. When multiple candles for different trading sessions are plotted, you can use various technical indicators to interpret the price movement and predict the next move of the stock.
Also Read: How to Read, Analyse& Use Candlestick Chart Patterns for Trading
Momentum Indicators
To know the worthy momentum in the stock price you can use various popular indicators like Relative Strength Index, Stochastic Oscillator or Moving Average Convergence Divergence. Using these parameters precisely you can identify the current trend and also analyse the possibility of change in the trend or turnaround in the stock price movement.
Also Read: How to Identify Trend in Stock Market: 10 Points to Find Trend
Moving Averages
You can apply the moving averages on the stock price for different periods like daily, weekly, monthly or for a particular number of days. The simple moving average usually applied for 20, 50 or 200 days can give you the short-term, medium-term and long-term trend of the stock price movement.
Also Read: How to Use Moving Averages in Trading & Convergence Divergence
Similarly, an exponential moving average is a weighted moving average that gives more weightage to recent trends and can give you truer picture of the stock price movement. You can also use the combination of these moving averages as per your understanding and applications.
Support and Resistance
The best way to analyse the trading range of a stock or market is to find out the trading range. To find out the trading range you have to identify the support and resistance levels where the stock price stops moving further. When these support and resistance levels are broken the stock price moves significantly in a particular direction for a few days.
Also Read: Five Best Support and Resistance Indicators in TradingView
When the resistance level is broken, you can predict the stock price for upward movement. On the downside, when the support level is broken, it means the stock price is going into a downward trend and you can enter into short selling or exit from your long positions.
Also Read: What is Short Covering in Stock Market & How to Identify Rally
Breakout and Breakdown
Identifying the right level of breakout or breakdown is another important parameter in the technical analysis that can be used to predict the movement of the market or stock market direction. When there is a breakout it means, the bullish trend is likely to start. If there is a breakdown, you can predict the bearish trend in the stock price or in the market.
Also Read: What is Breakout & Breakdown How to Identify Breakout in Stocks
Identifying the breakout and breakdown timely will help you to know the upcoming trend in the market or where the stock price is likely to move. However, sometimes there could be false breakout or breakdown signals, that you need to confirm with other parameters.
Volume Breakouts
Just like a breakout in stock price, there could be also a breakout in the volume of trades. This could be an important parameter to identify and predict the stock market direction. The volume breakout indicates there could be a significant change in the movement of the price of the stock. The trend can change or the current trend can move with more pace.
Also Read: Importance of Volume in Technical Analysis: Use & Role in Trading
Volume plays an important role in trading, if volume surges with an increase in the price of the stock, it means sellers are dominating creating a bearish trend in the market. While increase in the price with a volume breakout means a bullish trend in the market. Based on the volume breakout with either side movement you can predict the direction of the market.
Also Read: How to Add, Read & Use Best Volume Indicator in TradingView
Other Technical Indicators
Apart from these popular parameters, there are various other technical indicators like Bollinger bands, Commodity Channel Index, Supertrend, Volume Weighted Average Price, Average Directional Index, Advance/Decline ratio Keltner and Donchian Channel you can use to predict the market direction or find out the trend in the stock price.
Also Read: Top 5 Best Technical Indicators for Intraday or Day Trading
How to Predict Market Direction Using Option Chain?
Apart from technical indicators option market data can provide you with useful insight to predict the market direction. In the option market, you can analyse the call and put option data like trading volume and open interest or a combination of both to know the sentiment of the traders. Based on these data you can predict the movement of market or individual stocks.
The Put-Call Ratio (PCR)
This is the ratio of the total number of put trade options divided by the total number of call trade options. When the ratio is low it means the number of buyers is higher than the number of sellers which shows there is bullish sentiment in the market that can push the market in the upward direction. If this is higher or more than one it means the number of sellers is higher than the number of buyers which indicates the bearish signal in the market.
Also Read: What is Put Call Ratio & How to Use it for Options Trading
You can use the PCR values for main indices and other broader market indices. You can also use this ratio using the equity market data for individual securities. The PCR of individual security shows the data only for that particular security. And PCR for a particular index shows the option data for that particular index either its main index or sector-specific index.
Open Interest in Find Market Direction
This is another useful data in the derivatives market that you can use to analyse the trend and predict the direction. You can use the OI data to know the sentiment of the traders towards the market or individual stock. And based on the change in OI you can get to know current trends and expected price movement in the market or in a particular stock.
Also Read: How to Use Open Interest for Intraday Trading or Trading
The OI data represents the total number of contracts in the future and options market held by the traders or you can say the total number of open positions in the market. It shows the number of open positions is active, which means these open positions are neither exercised nor closed by the traders or exchanged within the expiry date.
The OI data keeps changing on a daily basis with the existing positions closed or the traders creating exercised and new positions. The increase in OI with an increase in the price means long positions are building in the market index, while the increase in the OI with a decrease in the price means short positions are created by the traders in the market.
Change in OI with Change in Price
To predict the market direction you can interpret and analyse the OI data with the change in OI. When OI increases and the price of the underlying security market index also moves in an upward direction, then it means the market is in bullish mode and is likely to move further in the upward direction creating an opportunity to enter into long positions.
Also Read: Best Option Strategy for Bull Market: 7 Bullish Strategies
If OI decreases and the price of the underlying security increases, it shows the market is in bullish mode with the possibility of trend reversal pushing the market into the bearish zone. With the increase in the OI the market goes down or the price of the underlying security decreases, it shows the market is in the bearish mode and there could be huge selling in the market.
Also Read: What are the Best and most Accurate Trend Reversal Indicators
Lastly, if the OI decreases and the market also decreases or the price of the underlying security also goes down then you can predict the market is going to move in a downward direction. To interpret the OI data in a better way you have to use various OI indicators that will help you to interpret and analyse the market movement more precisely.
Summing-up
To predict the stock market direction you can use various parameters that are categorized into fundamental and technical analysis. In the previous one, you can use various financial ratios like EPS or PE ratios to find out if the stock price is undervalued or overvalued. In the latter one, you have to apply various parameters like candlestick chart patterns, momentum indicators, oscillators and moving averages to predict the movement of the market.
Furthermore, you can also use option data like put call ratio and open interest to analyse the sentiment of the market and predict the market movement. Predicting the market movement precisely and every time with accuracy is not possible as there are various factors that affect the market movement and price of the individual securities.
Also Read: What are the Top Factors Affecting the Stock Market in India
However, to make a better prediction you need to analyse huge amounts of data in less time and interpret the market data or analyse the indicators timely you need an automated solution. Algo trading software can do this job better than humans using machine learning and AI-based algorithms to quickly analyse market data and predict the direction.
Also Read: Algo or Manual Trading Which one is better for the Option Market
