Stock market cycles may help to maximize ROI.
One of the market characters is that it has powerful and pretty consistent cycles. Its performance curve can be considered as a sum of the cyclical functions with different periods and amplitudes. Some cycles known by investors for long, for example, four-year presidential cycle or annual and quarterly fiscal reporting cycles. By identifying the cycles it is possible to anticipate tops and bottoms, as well as, to determine trends. So that the cycles can be a good opportunity to maximize return on investments.
It is hard to identify cycles using a simple chart analysis.
It is not easy to analyze the repetition of typical patterns in a performance curve because often cycles mask themselves; sometimes they overlap to form an abnormal extremum or offset to form a flat period. The presence of multiple cycles of different periods and magnitudes in conjunction with linear and non-linear trends can form a complex pattern of the curve. Evidently, a simple chart analysis has a certain limit in identifying cycles parameters and using them for predicting. Therefore, a mathematical statistical model implemented in a computer program could be a solution.
Be aware: no predictive model guarantees 100% precision.
Unfortunately, any predictive model has own limit. The major obstacle in using cycle analysis for the stock market prediction is a cycle instability. Due to a probabilistic nature of the market, cycles sometimes repeat, sometimes not. In order to avoid excessive confidence and, therefore, losses it is important to remember about a semi-cyclical nature of the market. In other words, the prediction based on cycle analysis, as well as, any other technique cannot guarantee 100% accuracy of prediction.
Back-testing helps to improve prediction accuracy.
One of the techniques to improve a prediction accuracy is back-testing. It is the process of testing prediction on prior time periods. At the beginning, instead of calculating the prediction for the time period forward, we could simulate the forecast on relevant past data in order to estimate the accuracy of prediction with certain parameters. Then the optimization of these parameters could help to reach a better precision in forecast.
Software makes possible using cycle analysis for stock price prediction.
To discover different patterns in the price movement, including cycles, investors use different software tools. They are able to extract basic cycles of the stock market (indexes, sectors, or well-traded shares). To build an extrapolation (i.e., forecast), normally they use the following two-step approach: (1) applying spectral (time series) analysis to decompose the curve into basic functions, (2) composing these functions beyond the historical data. Also the best software tools should include back-testing feature.
The stock market is an alive system – around can be joy or fear but its buy-sell pulse always exists. To discover different patterns in the market movement, including cycles, investors use different software tools. Sometimes, these computer tools are called “stock market software.” The stock market software tools help investors and traders to research, analyze, and predict the stock market.