Predicting Stock Market Using Expert Method

The more methods and information are taken into consideration, the more precise an investment-related solution and, consequently, the more profitable is investing. One of the forecasting methods that uses a collective wisdom is an expert method. This method can be explained by following. As example, an experimentalist shows a pen and asks about 40 people to write down their estimate of the length. Then he collects notes and calculates the average number - normally it is almost 100% accurate. Why it works? Everyone makes errors in different directions so that averaging gives a precise result.

An example of simplified expert method forecast in stock forecasting can be analysts' opinions that collected and averaged. Such information can be found, for instance, on Yahoo Finance webpage "Analyst Opinion" for each stock, it is called "Recommendation Summary". If mean recommendation is equal or close to 1, experts predict strong performance because "1" means "strong buy". If mean recommendation is equal or close to 5, experts predict stock decline because "5" means "sell". It is natural to assume that the more experts express their opinions, the better should be the result of prediction.

Another example of expert forecast could be using your own research of different factors that can contribute certain "opinions" in composed forecast. You can assign different weight for each factor and build an estimation based on weighted averaging. For instance, fundamental analysis may be one the most influential factors, then news factor, technical analysis prediction factor, seasonal price fluctuation factor, etc. All these factors should be added with different weight coefficients. Then the result should be divided by total amount of all weights.

One more idea is to read different current news, analytical articles, blogs, investor forums and draw a summarized conclusion from all opinions, positive and negative predictions. To make this process more automatic, it can be possible to participate on-line polls. There are some websites where you can participate in building a collective forecast for S&P-500 index. You can share your opinion by voting and see the result of composite forecast. If you use more than one method, approach, or tool for prediction, it could be reasonable to give a vote for each one. All participants may benefit from building a simple average forecast. However, do not put too much trust in any method alone - make your own conclusion.

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© Alex Shmatov. Published with permission of the copyright owner. Further reproduction strictly prohibited without permission.