Trying to Forecast Forex Rates is an Acquired Skill
Currency Trading February 26th, 2009
It’s hard to forecast the currency markets, but it’s what a large number of forex traders and brokers do every day, with varying degrees of success. Like forecasting the weather, predicting the currency market is sometimes a crapshoot, sometimes a guessing game, and always an adventure.
There are two basic methods on how to forecast the foreign exchanges markets. One is technical analysis; the other is fundamental analysis. We’ll review them both.
The technical approach examines past market trends and processes that data to predict the future. Previous trends in most areas of life are almost always good signals of the future; forex is no different. People have not changed much in the decades since the foreign exchanges market was created. People still buy and sell and react to stimuli in much the same 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 frustrating. Smart analysts tried to look at the general picture, to skip the minor details and evaluate trends over a longer period of time.
Using fundamental analysis to forecast 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. Someone 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 affect a nation’s economy can affect the exchange rates, and that’s what a fundamental analyst uses to guess at the forex market’s future
Naturally, this means having to know a particular country in-depth, which is hard to do for more than a few countries at a time. (It becomes even more complicated when trying to forecast the euro, since several different countries use that currency.) But having that kind of intricate knowledge makes it much, much easier to forecast forex trends.
Most good analysts use a mixture of both philosophies, technical and fundamental. For instance, a broker might see that a region is currently dealing with 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 confidence.
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