How To Predict Stock Market Movement Correctly: Part 2

As we all know, one of the essence of stock market prediction is knowledge so I will suggest some of the knowledge of stock market based on my shallow experience and education. Remember this, you can get this knowledge by either education, experience or even from good investment and trading book.

First of all we can divide knowledge of stock market investment and trading into 3 major parts: fundamental analysis, technical analysis and economic environment analysis. Each of these three analysis are essential for us to predict the future and gain some handsome profit.

However before i begin, here are some of the thing everyone should remember: never target to buy at lowest and sell at highest. We all know we should buy low and sell high but remember, we can't get the lowest price to buy and highest price to sell simply because we are not David Rockefeller. And No, we should buy when the price is low as we will never know "how low is low".

So when should we buy and sell?

We buy when we find out that there is a confirmation of a uptrend and we sell when we get the confirmation of a down trend. When the uptrend confirmation reached, the price is not necessary low but we significantly increase our chances of getting a return for our investment and that's pretty much investment is all about.

One more thing: never regret selling too fast when price continue to rise and vice versa. We sell because we get the downtrend confirmation and not because the price reach the top. A winning trade is a winning trade. Don't fell bad when this situation happen. You should fell please avoid a loss and get a reasonable amount of gain.


Fundamental Analysis

Fundamental analysis mean the usage of fundamental data from single company to predict the future stock movement. Generally fundamental analysis aimed for medium to long term investment. There are hundreds of fundamental analysis tools available. However i will only highlight some of it. I will divide it into 2 categories: useful and useless.

Useful

1. NTA / share.

NTA or net tangible asset per share is my personal favorite tools for FA simply because it work every time. NTA actually represent the actual value of a company and NTA / share represent the actual value of a single stock. Generally if a share traded below its NTA / share value, it's a buy.

If you carefully examine NTA / share you will generally find one trend. Share price of a Big company (blue chip) in general is higher than its NTA / share as the demand for blue chip company is relatively higher that medium and small cap. So should we follow the rest and buy blue chips or we should buy medium and small cap that provide us with a below NTA / share opportunity?

In my opinion, we should choose the second option. Every great investor including Mr buffett is telling us that we should buy blue chip but remember this: Mr Buffett made his fortune by investing in Berkshire Hathaway, a small company that had lot of potential.

I am not recommend you to buy any medium to small cap but rather choose medium to small cap company that traded below NTA / price. If you manage to find a blue chip with below NTA / share price, grab it!!!


2. Return on Equity

We invest in a company and become one of the owner of the company because we think it's a potential and profitable company. So we would like the company to perform well in the future but how would we know the company will do well in the future? Yes, using past data. Return on equity is a rather useful tool to target a potential great company. If a company maintain double digit ROE in the past 10 years or so, what make you think the company can't continue the trend. That's why ROE provide us the valuable information on the management quality to maintain profit and return on our investment.


3. Gearing Ratio

AKA risk ratio provide us the risk involved for investing in a company. Company with high Gearing ratio usually will has high fluctuation. That mean greater movement in stock price. Since Fundamental Analysis aim at long term, consistent return investment, company with lower gearing ratio is my choice. It provide us with steady return with low risk and that's sweet!

Useless

1. P/E ratio.

Yes, P/E ratio is one of the useless ratio. Although it is probably the most famous FA tool and used widely by investment banks in their analysis, it is absolutely useless. We will never know which is better, high P/E or low P/E. High P/E mean high demand and low P/E mean great value.

I've seen company with really low P/E ratio stay underperformed for more than 10 years. I've also seen company with negative P/E ratio maintained its high price for more than 5 years.

Look at all the market movers. They are stocks with high PE and negative PE and yet they still lead the market one way or the other.

So basically PE ratio is the absolute useless tools to find valuable and potential company.

2. Current Ratio / Quick Ratio.

To be honest, current ratio or quick ratio is one of the most famous but useless ratio. As everyone know, difference between current ratio and quick ratio is inventory. Both ratios offer no help to you to find a potential company as they only give you very limited information about short term solvency of a company.

Company in different sector will provide different value of CR or QR. Example consumer sector companies normally have high CR /QR while property and construction companies normally have low / below 1 CR / QR.

So the figure never give you any information how good a company is.


Technical Analysis

Technical analysis is much more complicated than FA. Generally TA provide relatively shorter term information on market movement or stock movement. TA involve use of chart to analyze the market.

TA is crucial to predict short term market movement and an expert in TA will have more than 80% chance of correctly predicting the market.

So what you need to predict the market in short term?

1. Moving Average.

Moving average is probably the most important tool of TA. It provide support and resistance level for us and based on my experience, more than 90% of the time simple moving average (SMA) will work as support and resistance.

However, you may wonder what the number of SMA to use.

For index and commodity, you should use 18, 45, 100 while for single stock the magic number is 10, 20, 60, 100, 200. Example if you are looking at 1 minutes chart of an index, what you need is SMA of 18 minutes, 45 minutes and 100 minutes.

2. Fibonacci

Fibonacci is another absolutely important tool of TA. Like SMA, it provide crucial information on support and resistance. Together with SMA, it provide an ultimate support and resistance data with accuracy of more than 95%!

At you need to do is tick the lowest and highest point of a run and look at 68.2%, 50%, 38.2% level of that run. It will serve as either support or resistance of the counter move.

Example, stock market spiked up for the last 3 weeks. So now if market reverse which i think will happen, 68.2% of that spiked up run will be our first level of support, 50% will be our second support level and 38.2% will be our third support level. If market brake 38.2% support, then most probably market headed toward the original point of that spiked up run.

3. Elliot Wave.

Elliot wave is a super complicated tool of TA and it is so accurate i think all investor and trader should learn. Although Elliot wave provide no precise information on the market, it tell you where you are and where the market is headed. You can't know how many point market will rise or drop but you can know when market will rise and drop and where it is heading to.

Elliot wave use a simple 3 wave pattern for bearish market and 5 wave pattern for bullish market to predict the market and believe it or not, it work most of the time. Besides that, you can use it to predict the market in short term or long term.

4. RSI

Relative strength index is another popular TA tool. It provide fairly good information on the movement on the market. When RSI reach 70 or above , the market is said to be overbought while RSI 30 or below is said to be oversold. Market tend to reverse after that.

However, RSI only suitable for index and commodity and not suitable for stock. Stock can reach as high as 99 on RSI and stay there for sometime so beware.

5. Stochastic

Stochastic is highly important TA tool which basically tell you either the market is overbought or oversold. Unlike RSI, stochastic work for index, commodity, stocks or other financial assets.

You should always use fast stochastic with 14 period as it provide more accurate data.

Stochastic analysis involve 2 lines: K line (usually black) and D line (usually red). In normally circumstances, when K line crosses D line, market will reverse. Of course to confirm the reversal movement, we usually wait for one of two trading period to confirm.


Economic Environment Analysis.

Economic environment analysis mean predict the market movement using economic indicator such as interest rate, inflation rate and unemployment rate.

To master this analysis, you should either go through a good education system, read a lot of investment and economic books, or have years of experience in investment.

Although this analysis does not feels very complicated, it's actually the hardest part to master. Most traders or investors do not understand economic environment analysis thoroughly but they think they do.

It's far more difficult to predict the economy than to predict the market and remember: it's the economy which affect the financial market and not the other way around.

Financial market go up will not cause the economy to improve but rather because of improved economy. Worsened economy cause the stock market to tumble and not the other way around.


Conclusion

First of all, I am not saying i am at expert in predicting the market. I am only a regular guy who went through some years of education and have some experience in financial market.

Also, I am not saying you must use those tools to predict the market. I just found out those tools are good enough for you to correctly predict the market. I truly believe you will be able to do that with those tools i recommend. FA + TA + EEA = more than 80% successful rate.

Do your homework and profit isn't far away!