Doing business would be so much easier if we could only look into the future and see how the market is going to act in the next year or at least half of a year. But the market is a vibrant and constantly changing system that tends to take very unexpected turns from time to time. Yet, forecasting market trends is not impossible if you know the right methods. And these glimpses into the future surely give an important advantage.
Seeing the future in today’s data
To know the future these days, we consult not the oracles or prophets but science and business professionals instead. Forecasting is done by looking at the available data on current and historical market trends and extrapolating it into the future.
The forecast could be made about the future of some market sectors in general, or about something very specific, like the future sales of a particular product. The prediction is made by analyzing the available data on the variables that historically have been relevant to the investigated case, as well as current market information.
Almost every managerial decision is based on some sort of prediction. The question is how well the predictions are based on available knowledge. If the prediction is only based on personal experience, it is not guessing completely, but also lacks in foundation, as isolated experience is not enough to fully understand market trends. The more data is analyzed and the better the tools and methodology are fitted to the particular case, the more reliable the forecast is going to be.
This means that the question of forecasting market trends is not whether one should do it. Every manager has to make predictions about the future of the field. The question is how well those predictions are based. Therefore, it is extremely important to make use of as much data as possible.
5 Methods to determine where the market is headed
Through the history of Western entrepreneurship, various methods of forecasting market trends have been designed. Let us look at 5 techniques that have been used with high levels of success.
1. Input-output analysis
This method is based on the idea that when there are two interrelated economic sectors, and the relationship is known, then by looking at the data of one sector, we can make predictions about another. This means that even if we do not have enough data about a particular industry, we might predict its growth or demise by looking at another industry that is related to it. For example, we can forecast the future of the coal industry by looking at the data we have on the steel industry and the historic relations of these two industries.
2. Trend projections
This is the classical and reliable way of forecasting usually used to predict the future sales of a product. For this method, it is necessary to have historical data of sales of this or similar products. This data is fitted to a mathematical equation, which defines the previous progression of sales numbers over time and projects it into the future.
3. Regression analysis
This is a mathematical model for figuring out the dependent variable based on independent variables. The important thing is to know the relationship between the variables. A clear example is the relationship between changes in GDP and total sales of a business. Concluding from the available data what is the relation between GDP and your company’s sales and knowing how GDP is expected to increase or decrease, you could calculate the future sales. This would allow for better budget planning and preparations.
4. Expert opinion method.
A special case of this is the Delphi method. It is based on the assumption that experts in the industry presented with carefully designed questionnaires will be better at arriving at correct predictions than a focus group from the general population. The experts should independently provide their answers and the reasons for them. Then, seeing the answers of other experts would adjust theirs. After a predefined number of such rounds of answering and adjusting, presumably, there would be a consensus regarding the forecast in the case at hand.
5. Econometric model.
This model of forecasting combines regression equations describing relationships of variables from different economic sectors. This allows us to arrive at a more nuanced and complete forecast as it considers many different parameters. But it also requires a lot of different data to be gathered and analyzed.
The better the data, the better the forecast
Many methods for predicting market trends have been and will be created. The 5 above are known to be among the most effective. However, what method should be used depends on what exactly do we wish to forecast. Whichever method is used, the important thing to understand is that its effectiveness depends highly on the quality and the amount of data that is used.
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