It’s no surprise that the forex market allures every finance novice. Its daily turnover above $6 trillion is the highest, and many have become millionaires from trading currency pairs. But how do they forecast the market to be so profitable and can the forex market even be predicted?
The forex market can be predicted by fundamental or technical analysis. Fundamental analysis entails studying the impact of various social, political, and economic factors on a currency pair, while technical analysis involves predicting its future price movements based on past results.
Read on as I provide more insight into predicting the forex market. You will learn how traders employ either analytical method and possibly combine them for the best results.
Predicting the Forex Market by Fundamental Analysis
For many forex traders, fundamental analysis is the best method of predicting the market objectively. Although it has always initially felt complex and intimidating to the uninitiated, it can prove indispensable once you get the hang of it.
Let’s dive into more details.
What Is Fundamental Analysis in Forex?
Fundamental analysis in forex means understanding the forex market by analyzing various real-life factors that affect a currency price. These factors can be social, economic, or political. By anticipating certain news, events, or announcements, traders predict the outcome of a currency pair.
Essentially, this analysis predicts whether an economy will become bigger or smaller in the future–and by how much. The real-world scenarios analyzed will influence the economy, which dictates the supply and demand of its currency.
This ultimately impacts the exchange rate as well. When people feel confident a country’s economy will grow, they will be keen to purchase their currency. This will cause the value of the currency to increase.
Pro fundamental traders use a forex economic calendar to alert them of important upcoming events. I most recommend Forex Factory due to its detailed yet intuitive layout. Apart from the various news sections available, there is a forum where you can join and seek other forex traders’ expert opinions.
Your interpretation of the event, personal strategy, and other traders’ takes will then influence how you decide to trade & benefit from it.
Major Fundamental Analysis Factors
In reality, there are dozens of factors that can affect the growth or decline of a currency. Even trivial sentiments from renowned world leaders on social media have impacted the market. However, I’ll only discuss three significant events fundamental traders most anticipate below:
GDP Output
Every country’s Gross Domestic Product (GDP) is measured monthly, quarterly, and yearly.
On release, a higher than projected value will strengthen the nation’s underlying currency versus the other in a forex currency pair. Conversely, a lower than projected value will weaken the underlying currency versus the other in a forex currency pair.
A trader will hence buy-long or sell-short the affected pair.
NFP
The Nonfarm Payroll (NFP) gives an insight into the United States’ unemployment status, therefore, the economy. The news affects every Major currency pair when released at 8:30 a.m. EST on the first Friday of every month.
If the unemployment rate from the released NFP value is higher than typical, the USD weakens versus its other currency in a pair. But if the unemployment rate is higher than usual, the USD strengthens versus the other.
CPI
The Consumer Price Index (CPI), when released (on dates that differ from country to country), enlightens about economic growth and inflation levels.
On deeper study into past releases and outcomes, experienced fundamental traders anticipate a significant currency pair’s movement.
Predicting the Forex Market by Technical Analysis
Predicting the forex market by technical is more subjective than fundamental analysis. On most occasions, no two traders have the same methods, seemingly absurd from a superficial sense, but it can be rewarding if you truly understand why and how.
What Is Technical Analysis in Forex?
Technical analysis in forex means studying historical forex price chart patterns expecting them to repeat in the future. It involves using numerous tools, like indicators, to signal a particular potential move. In nature, this analysis is subjective because every trader reads charts differently.
Technical analysts believe that the future repeats itself with chart movement patterns.
They open market orders on specific positions on the chart where they perceive a trend continuation or change in direction.
Unlike fundamental analysis, technical analysis requires using as many possible tools provided by your forex trading platform. Few of these tools/indicators include:
- Regular lines and shapes.
- The stochastic oscillator.
- Relative Strength Index (RSI).
- Average Directional Index.
- Moving Average Convergence Divergence (MACD).
A good explaining of a forex Therm you find it on this blogpost https://noasnoas-socialtrading.com/is-a-pip-and-bps-the-same-thing-what-you-need-to-know/
What Forex Technical Analysts Try to Identify
There are no hard-and-fast rules regarding technical analysis owing to its subjectivity. Every analyst has a unique strategy for prediction, but most try to identify price formation in a chart from:
- Trends,
- Patterns, and
- Support & resistance levels.
I’ll discuss in detail:
Trends
Trends are the price movement in a particular direction over a long or short period. They can be
- Up (bullish),
- Down (bearish) or
- Sideways.
Technical analysts will look to quickly enter long or short trades to capitalize after confirming the start of any trend.
Patterns
Forex price charts form many patterns technical analysts anticipate placing a trade. Some examples include:
- Head and shoulders.
- Wedges.
- Triangles.
- Engulfing candle patterns.
- Double top and bottom.
Traders will predict the price movement after affirming the pattern formation with special tools, as earlier discussed.
Support & Resistance Points
Support and resistance levels are crucial in predicting the forex market technically. They are levels traders expect a price cross or pullback owing to historical outcomes.
Usually, a support point is below, and resistance is above. When the price hits the support in a bearish trend, it mostly rises back up. And conversely, when it hits the resistance level in a bullish trend, it changes direction down.
Predicting the Forex Market with Both Analysis
Some forex traders also employ technical and fundamental knowledge together in predicting the market. Their day-to-day practice can primarily involve technical analysis but anticipate a momentum shift on main events, thanks to economic calendars. You can make more seemingly accurate predictions by analyzing the market with both methods.
Conclusion
You can predict the forex market by fundamental or technical analysis.Fundamental analysts are most concerned with the economy’s well-being and the impact of real-world events on its underlying currency. On the other hand, technical analysis involves reading charts to anticipate repeated patterns or movements with special tools.
Forex traders today also employ both methods for greater accuracy of predictions.
Sources
- BIS: Triennial Central Bank Survey of Foreign Exchange and Over-the-counter (OTC) Derivatives Markets in 2019
- Wikipedia: Economic calendar
- Forex Factory
- IMF eLIBRARY: Back to Basics: What is Gross Domestic Product?
- Wikipedia: Nonfarm payrolls
- Investopedia: Major pairs
- The World Bank: Meta Data Glossary: FP.CPI.TOTL
- Dailyfx: Explaining the Stochastic Oscillator
- FBS: MACD (Moving Average Convergence/Divergence)
