How to Predict Stock Market Direction: Important Parameters

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.

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.

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.

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.

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.