How to avoid being fooled by the stock market predictions?

Every investor, no matter how long he has been in the world of investments, keeps asking questions about the future of the market and searching for stock market predictions. They continue to search for two values ​​in particular: first, the value of the investment owned in the current time, and second, its future value upon selling.

But, can you really get your hands on the stock market predictions for tomorrow? Of course not. No one can predict the market and investment prices, due to several reasons related to various circumstances.

On the other hand, investors seek to obtain information and data about the market, using modern techniques and tools, or through reviewing past pricing history and using it to influence their future investment decisions. 

In this article, we look into different views that will help you avoid being fooled in the stock market.

What are the 3 ways to avoid being fooled?

Rule no. 1: Don’t get overwhelmed by rumors

Fears that aggressive rate hikes by inflation-fighting central banks around the globe could lead to a recession theme are broad-based, and the relief in global stocks in the first weeks of 2023, is likely to be short-lived as investors expect Fed hikes to continue.

Fear is one of the most common mistakes among investors. When the market witnesses fluctuations or stock prices drop, investors tend to make bad decisions, because they feel afraid of losing everything.

Selling stocks when things go wrong means that the investor will always sell low, and lose out on the opportunity to make profits when the stock markets pick up again. Investors can apply the advice of the famous American investor Warren Buffett, to invest more money during times of low stock prices, instead of selling.

There is another case where investors get too excited because stock prices seem to be going up, which leads to unjustified appreciation of assets, and that pushes investors to buy overvalued stocks.

Rule no. 2: Don’t exhaust your investments with high false predictions

Trying to buy stocks when their prices go down and sell when they go up sounds like a good strategy, but the problem is that people can’t be fully sure about stock market predictions, and thus are not able to forecast when stock prices will reach the perfect point.

 In the stock market, waiting and not making appropriate decisions, due to poor timing, can lead to thousands of dollars being lost. Instead, you need to have access to live data and market updates that enable you to get your hands on the real prices of stocks without any delay.

It is also important for investors to set reasonable expectations about the amount of profit that their investments will achieve, and to avoid unrealistic expectations of the size of the return on investment, by analyzing the past performance of the stocks in which they are considering to invest in.

Rule np.3: Don’t lose the ability to balance risk tolerance

There is an inverse relationship between risk and potential reward, the riskier the investment, the higher the potential returns.

Investors need to make a calculated decision about how much risk they are willing to take, so that they can decide how much money they want to invest in stocks.

While many investors are afraid to take risks, others take a lot of risks, thus threatening their future.

If a person invests in high-risk assets, or puts a lot of his money in the market, he risks facing great losses if things go wrong, so it is important for the investor to make sure that the amount of money he invests and the risks he takes are commensurate with his goals.

In many online investing platforms, such as Wealthface,  portfolios are being balanced quarterly based on the risk profile of each investor.

What is the greater fool theory?

The Big Fool Theory is one of the well-known theories in the field of economics and investment, and this theory states that there will always be an investor, that is, the “greater fool”, who will foolishly pay a price higher than the intrinsic value of the thing offered for sale in the hope of more profit.

The biggest fool theory states that the price of an asset is not determined by its intrinsic value, but rather by market participants’ irrational beliefs that there will always be someone “dumb” enough to pay a higher price than the seller. In other words, if an investor buys a security or an asset at a high price, he will be able to find a buyer who will pay a higher price, and this continues until he reaches a point of saturation and everything collapses.

The origin of the name of this theory comes from the idea that if an investor makes a foolish decision to buy an expensive asset, he can find a “big fool” to take it off his hands, and so the chain goes on until finally the game breaks down and the big loser goes to the “big fools”.

Can Artificial intelligence help investors to avoid being fooled?

With the tremendous technical development that our time is witnessing with the entry of the products of the fourth industrial revolution – including algorithms, artificial intelligence and machine learning – in every field of life, the question that arises is whether artificial intelligence can be used for stock market predictions.

The answer is definitely yes, as reliance has increased recently on the use of artificial intelligence to predict the movement of the stock market, but can blind confidence in the use of this intelligence lead to the loss of capital for traders and investors around the world? And to what extent can we rely on this technology to predict the movement of stocks with reliable accuracy?

Stock market analysis

Researchers discussed the three main analysis methods used by investors around the world to predict market movement. The following two methods are used to analyze the movement of stocks in the stock market:

Fundamental Analysis: This school of finance attempts to calculate the intrinsic value of a stock based on the company’s revenues, profitability, degree of liquidity available to it, and operating efficiency. Ideally, if the intrinsic value is greater than the “last traded price” (“LTP”), then it should be bought, and if the intrinsic value is less than the “last traded price” then it should be sold.

Technical Analysis: This methodology uses historical data of the share price using a combination of indicators – such as the Relative Strength Index (RSI), the Moving Average Convergence/Divergence (MACD), and the Money Flow Index (Money Flow Index) (MFI).

It tries to know the market movement through it, so if the technical analysis indicates that the share price will rise, then this will lead to a purchase order, and if the analysis indicates that the share price will decrease, then this will lead to a sale order.

The Bottom Line

Although AI can predict stock price trends or general sentiment about the movement of financial markets, its accuracy is not sufficient. Investors gain from maintaining flexibility in their positions and avoiding being bound to a specific direction due to a prediction. Market forecasting may be risky, and ultimately, profits can be achieved without predictions. It only takes choosing the right platform and the right advanced tools.