It’s not easy to predict the forex markets, but it’s what a large number of currency traders and brokers do every day, with varying degrees of success. Like predicting the weather, predicting the foreign exchanges market is sometimes a crapshoot, sometimes a guessing game, and always an adventure.
There are two basic philosophies on how to predict the currency markets. One is technical analysis; the other is fundamental analysis. We’ll review them both.
The technical methods evaluates past market trends and uses that data to forecast the future. Previous trends in most areas of life are almost always good signals of the future; currency 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 traders tried to look at the big picture, to skip the minor details and evaluate trends over a longer period of time.
Using fundamental approach to predict foreign exchanges markets is a bit more in-depth, but it can also be highly accurate. Basically, fundamental method means predicting the market based on external factors — political moves, government involvement, social movements, even the weather.
Broker good at fundamental method might predicting foreign exchanges 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 foreign exchanges market’s future.
Naturally, this means having to know a particular nation in-depth, which is complicated 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 expertise makes it much, much easier to forecast forex trends.
Most good brokers use a combination of both approaches, technical and fundamental. For example, a trader might see that a region 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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