METHODS OF STOCK PREDICTION METHODS OF STOCK PREDICTION
Driven by the desire to predict market movements and reap profits, there are three different trading schools of thought: fundamental, technical, and quantitative technical analysis.
Fundamental Analysis
Fundamental analysis involves the examination of economic factors that influence the price of a stock. Such factors include a balance sheet and income statement. The balance sheet is a financial statement that provides information about a company’s assets, liabilities as well as the equity of their shareholders at a specific point in time. Basically, the balance sheet gives intel into what a company owns and owes and the amount investors have invested in it. The income statement is another type of financial statement that gives a synopsis of a company’s performance by providing information about their revenues, expenses, and net profit/loss over time. These reports are released quarterly throughout the year. Because fundamental analysis relies on repo
rts that are issued on the basis of a slower time frame, this type of analysis is often used to project long-term price movements
Technical Analysis
The goal of technical analysis is to anticipate what other stock holders are thinking based on available information about the price and volumes of stock. Technical analyists use a number of different types of indicators calculated from the past history of stock price and volume to predict future prices. Overall, the key to technical analysis is trend. Practitioners of technical analysis argue that trends in stock prices are caused by an imbalance between the supply and demand of stocks, which is reflected in the bid and ask prices. From the noisy data of stock prices, technical analyists attempt to extract patterns. Technical analysis is largely qualitative because it relies on the visual analysis of stock charts [9]. Two examples of such stock charts are shown below. Fig. 1 represents historical price data for stocks for the IT sector for one year. (It should be noted that I have chosen the IT to train an algorithm because stocks in the same sector usually exhibit similar price movements). Fig. 1,2 and 3 represent candlestick charts. Each bar or “candle” represents one day’s high, low, and closing prices. The additional lines on the charts are examples of different technical indicators. (Please note brief explanations of how technical traders would utilize these symbols are shown on the charts).
Fig. 1: Relative Strength Index Fig. 2: Oscillator
Fig. 3: Moving Average
Quantitative Technical Analysis
This qualitative aspect to our second school of thought is what differentiates it from our next methodology. (Please note that we will revisit Quantitative Technical Analysis My capstone project explores this form of stock prediction. As suggested by its name, this form of stock prediction relies on quantitative methods of prediction rather than visualizations on graphs. Specifically, I will explore the usage of machine learnings algorithms to predict future stock prices. [10]
