Feb 6 2009
It’s hard to forecast the currency markets, but it’s what many of foreign exchanges traders and brokers do every day, with varying degrees of success. Like predicting the weather, forecasting the foreign exchanges market is sometimes a crapshoot, sometimes a guessing game, and always an adventure.
There are two basic principles on how to forecast the forex markets. One is technical analysis; the other is fundamental analysis. We’ll look at them both.
The technical approach evaluates past market behavior and uses that data to predict the future. Previous trends in most areas of life are almost always good indicators of the future; forex is no different. People have not changed much in the decades since the forex market was created. People still buy and sell and react to stimuli in much the similar way as they did 50 years ago.
Since foreign exchanges rates change constantly throughout the day, every day, looking at all the years of past data can be overwhelming. Smart analysts tried to look at the big picture, to skip the minor details and analyze trends over a longer period of time.
Using fundamental analysis to predict forex markets is a bit more in-depth, but it can also be highly accurate. Basically, fundamental analysis means forecasting the market based on external factors -- political moves, government involvement, social movements, even the weather.
Analyst good at fundamental analysis might forecast forex drop-offs because he knows a country’s government is unstable at the moment, or increases because the country has just elected a popular new leader. Anything that can influence a country's economy can influence the exchange rates, and that’s what a fundamental analyst uses to guess at the currency market’s future.
Naturally, this means having to know a particular region in-depth, which is difficult to do for more than a few countries at a time. (It becomes even more complicated when trying to predict the euro, since several different countries use that currency). But having that kind of intricate knowledge makes it much, much easier to predict currency future.
Most good analysts use a combination of both norms, technical and fundamental. For example, a analyst might see that a country is currently facing a particularly strong hurricane season (fundamental) and know that in the past, strong hurricane seasons have meant a weaker economy for that country (technical). Thus, he can predict down-turns for that nation with some degree of accuracy.
A basic understanding of the foreign exchange market is not enough, at least when you are past the beginning stages of your trade. Constantly updating yourself is one of the best ways to guarantee higher chances of success and gain. In the trade of currencies, there are three basic factors that affect or regulate a fair currency exchange between two countries
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