Machine learning and artificial intelligence are used to predict the market based on past numbers and their curves. Yes, they do end up being accurate sometimes but the data could be filled with errors too. And stock markets can be really difficult to predict since there are too many factors in play. Also, you cannot predict the downs of the market like the great recession of 2008 when the Wall Street markets crashed. It had a worldwide effect and crashed markets in various countries.
Contents:
Why Are Markets Difficult to Predict
Disadvantages of Prediction
You cannot predict the future like the downs and ups
Predicting contingencies is impossible
Stocks volatility has increased
Stock prices rarely increase in one curve for a long time
What Can You Do Instead?
Final Thoughts
Why Are Markets Difficult to Predict
Apart from multiple factors that are included in the model that helps to predict the future numbers in the market, there are certain things like natural disasters, pandemics, and political moves that can upset the market too. Natural disasters and pandemics are something that cannot be predicted and by the time it starts spreading, it is too late to handle the market. Also, sometimes, there are absolutely irrational reasons behind the market’s numbers.
There are several models that can be used to predict the market but if a certain model is mimicked by others too, it causes the market to behave in a way nobody would predict. Let’s take an example. Let’s say you use the X model to predict the future of ABC company. Of course, you would try to use this model to gain profits.
What you are forgetting here is the fact that this model is not limited to you. There can be others who will use the same knowledge to use in ABC company. When too many people invest, the percentage of profit decreases and sometimes goes negative too. Therefore, it could be difficult to predict whether the ABC company will touch the sky or hit the ground hard when using the model.
Most of the prediction models are not meant for 99% accuracy. They are merely trends that give you a heads up as to what will provide success or failure. These are more like a guess rather than a precise prediction.
While you are predicting the future of the market, you should know something called the confidence interval. It is the chance of error that is always added in any model of prediction. And in the market, the confidence interval is way too much to even be anywhere near perfect prediction.
Disadvantages of Prediction
Well, we all know the advantage of predicting the financial future but we have to go through the problems with the following predictions. Let's check them out!
You cannot predict the future like the downs and ups
It doesn't matter how good the model is or how precise the prediction is. There will always be certain factors that nobody predicts. Take for example the COVID 19 recession. All the major companies had to shut down and caused major losses. Also, most of the predictions are based on the fact that the environmental factors stay undisturbed.
Predicting contingencies is impossible
There are times without any pandemics that the stock market just doesn’t follow the prediction laws. For example, if you predict that the prices will go up when the market has crashed, that will cripple the company.
It is impossible to come up with a contingency plan then and there. Or if you predict that stock prices will go down when the market is financially booming then you won’t necessarily have negative effects for a long time.
Stocks volatility has increased
Stocks volatility has increased over time. It is becoming impossible to buy and keep stocks. You might end up losing a lot of money doing that. This is the time for active trading. Trading on short timelines is way more profitable and safer. But short-term trading can backfire.
Stock prices rarely increase in one curve for a long time
The prediction of prices is based on the fact that the process behaves in a similar manner over a period of time. Based on the past events, and how the stocks have gone up and down, the forecast is made whether the prices will increase or not.
Usually, the prediction as a graph is a straight line going up but that is rarely the case. The prices never stay high at the same rate.
What Can You Do Instead?
Now that you know prediction is not helping, it must be scary not knowing how the stocks will react and you might feel not ready for the future. Here are some alternatives to the traditional prediction models like LSTM:
- The movement of prices is like a wave rather than a straight line.
- The support or opposition you are getting will be withdrawn with time.
- Take the prediction models as trends to follow rather than precise financial forecasts.
- Try the services that provide historical and real-time market data like Finage.
- Manual research is better than machine learning and forecasting.
Final Thoughts
It is possible that your prediction model has been telling you what to do and that knowledge has been giving you positive results. But it is suggested to not simply rely on that model. Once that model becomes accessible to everyone, the whole trend will turn upside down.
Go through the past events yourself, major stock disasters, and come up with contingency plans to save your company when the time comes. Always have a backup plan for financial disasters and check the market data. Use the results of prediction to know the latest trends and work on them rather than by acting exactly how the machine asks you to do.
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