A stock market is a financial market where multiple shares and securities are traded. It wouldn’t make sense over here to go through the details of what exactly a stock market is and the definitions of shares and securities, but what we are going to talk about is how statistics is fundamental for the analysis of the stock and the foreign exchange market (also known as the forex market).
A forex market is a simple yet complicated market. In these markets there is a complete and continuous movement of prices. Prices if moved in the direction of the prediction will cause a gain for you and prices if moved in the opposite direction tend to trigger off a loss. The reason why the stock market works on statistics is because of the combined-individual issue. The stock market is very unpredictable and if focused on an individualistic behavior it’s very difficult to depict. On the other hand if there is a combination of shares and securities then it can be often devised an overall pattern.
Many people believe that statistics is unnecessarily too complicated and one does not need that level of difficulty to decipher the prices or the movements in the forex or the stock market. But here we are not talking about high level statistics. Only basic mathematics is what is required. Stock market is simply the play of numbers. A simple example on how statistics is used to depict the market are the financial indexes we see any days on the news – the Dow Jones Industrial Average (U.S Stock Exchange Market), SENSEX, NIFTY – all run on the basic average method. All stocks are taken and a simple average with a market capitalization method gives the value of the index.
There are ups and there are down in any financial market. This up and down movement causes a zig zag curve that allows for the fluctuation (volatility) and gives some scope for prediction. Statistics uses formulas and it is with the help of these very formulas that one can infer the movement and decide whether or not to trade in the financial market. Forecasting formulas are many and often complex and won’t be discussed here. But there are many statistical tools and softwares that you can find on the market that make all the hard work for you. These tools simplify the otherwise lengthy and as said often complex process of calculating whether or not the price will be moving in a favourable direction or not.
Excel is a tool that may actually help to calculate statistical formulas. Excel makes the calculation simpler by just writing in the formula. Since statistics plays with numbers, it is very often used in any analysis that involves a lot of number and figures. What statistics can do with numbers and figures, nothing else can. Prediction and forecasting, especially the use of the time series analysis in econometrics makes life simpler in such situations. Financial markets depend a lot indeed on the time series analysis and if you are not already an expert on the topic you should learn something more about it.