Predicting Stock Price Before Making The Trade

Predicting stock price is a tedious task for stock market investors. Though knowing exactly what a stock price is going to do is impossible to predict, there are things you can do to effectively determine what a stock price should do from the time a buy signal is received.

Predicting Stock Price

From the time you find a stock that you want to buy, you begin a process known as research. Research helps determine if a stock is even worth pursuing.

The price movement of the stock is one of the key factors to establish "worth" in any trade.

Your goal is to determine if the rise in price worth it or not?

Stock Price Swing

Predicting stock price movement, whether up or down, requires a stock chart and some drawing tools. Sometimes it beneficial to print out a chart and use a ruler and pencil to make estimates, but it's not always required depending on the charting system and tools you are using.

One of the charting indicators you can use to determine a rough length of a price swing is ATR or Average Price Range. This indicator shows the average change in price up or down over a period of time. This number is great, but doesn't show the direction of the price, meaning the stock price could go up or down whatever the ATR value is. This number is better for calculating risk, but in order to figure out a good exit point, you need to be able to figure out price swing.

Stock prices oscillate up and down based on many factors including overall market direction, sector direction, sector strength, individual stock financials, history, news, stock value, and company popularity. Price swing up will occur after a stock becomes oversold and is at a discounted or cheap price for an investor. Price swing down will occur when a stock becomes overbought and is too expensive to buy any more.

During these highs and lows, the stock price will rise and fall based on supply and demand of the buying and selling shares of stock.

Predicting Stock Price Based on 3 Chart Elements

Predicting stock price can be more accurate when considering three chart elements after finding a potential stock to trade.

NOTE:  A potential stock to trade is one that meets your criteria to buy.

Element 1: The Stock Trend

The traditional time to buy a stock is at the bottom of a down trend. Short term trades are based on short term trends and long term trades are based on long term trends.

As a rule of thumb, a short term trend is based on information from the last 14 days of daily prices or candles. A long term trend is based on 50 or more days of prices.

Go back in history on your chart for three months and determine the short term trends for the stock. Also look back to six months and draw the long term trend. Refer to stock trend <link> for help with this.

Look for patterns in the trends. If two up trends are a certain length, the future trend will probably be the same length (due to the natural oscillation of the price). These trends are also at a certain angle. This angle will be helpful in determining future movement.

Element 2: Momentum

Predicting stock price movement must take into account momentum of the stock price. Momentum is the driving force of the power behind stock price moves.

Over time, momentum shows a normal pattern up and down above and below zero. When predicting stock price for a future trade, looking at the history of momentum helps determine if the movement will be the same, less, or more than the last trend change.

If momentum is the same as the last shift up in trend, the price of the stock will most likely follow the same trend back up. If momentum is less than the last shift up, the price may move up slower or not as far of a move as the last time. If momentum dips well below the last trend's bottom, it will most likely spring back faster and may go further than the last trend while heading up.

Think of momentum as a trampoline. If you barely move up and down on the trampoline, you will barely lift off of it. But, if you push way down as hard as you can, you will jump way up over the surface higher than the last time. Momentum is the same. If it dips way below the average surface, the price will jump up faster and farther.

Element 3: Price Range or Average Range

When predicting stock price changes for the future, utilizing the price range or average price range will help verify the estimate you've come up with so far. The higher the ATR, the more likely the price will go farther than with a lower ATR.

Let's say your estimate up is expected to have the stock price five dollars more than the low. Look at the ATR. Calculate the ATR out to the expected day the price should be reached. If it is 5 days, multiply the ATR by 5. See if it is a reasonable estimate. If it is off by a lot, you may consider adjusting it up or down a little.

Determining an Exit Point

To make the most money in a stock trade, you want the most potential trend up after purchase. Lower priced stocks move smaller amounts than larger priced stocks. But any gain is a win, right?

Determining an exit point, no matter what the price of the stock, can be done by setting a stop limit at the 90% mark of your predicted price.

This accounts for any errors while predicting stock price. At the point of profit, you can also place a trailing stop loss to follow the price up. If the price drops during the day, the trailing stop loss limit will stop following and stay at the last price that way if the price goes too far down, it will automatically sell at that stop.

You should also have an exit plan in place if stock price goes the wrong direction from the initial trade.

Successfully predicting stock price is very satisfying and well worth the extra effort you put into it. If the price doesn't go the right direction, modify your prediction to recalculate your exit up. Never change your stop loss exit point down if a price move goes the wrong way. Daily events, news, world events, and consumer sentiment can greatly influence what a stock price does and things may not happen exactly as planned.

Preparation and planning are the keys to a successful investment. Do you homework before the trade to ensure the most success from your trade.

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