Is forex easy to predict?

Although forecasting the forex market’s trajectory is difficult, traders now have access to more tools and resources than ever before. Here, we examine some of the resources available to traders in an attempt to forecast exchange rates and forex movements.

The 外汇市场, or forex, is the most traded market in the world.

The $7 trillion exchanged daily in forex markets far surpasses the hundreds of billions traded on stock markets worldwide.

Traders like you and I are trading trillions of dollars’ worth of forex every day, even though the large banks and corporations account for the great majority of daily forex trading.

Supply and demand are the two main factors that influence forex. In turn, sentiment is the only factor that influences both of these. However, a never-ending list of factors shape sentiment, and investors’ moods are extremely sensitive to the deluge of information, data, and other developments that occur throughout the day.

Nevertheless, investors now have more tools than ever before to support their forex trading strategies, enabling them to employ a variety of techniques and strategies to give them a competitive advantage. However, this has also increased the level of competition in the forex market.

Which strategy should investors employ in order to forecast forex movements?

Forex traders should establish the fundamentals of their strategy, such as which currency pairs to trade, before choosing a course of action.

Major currency pairs like EUR/USD, GBP/USD, and USD/JPY account for most of the trading volume in the forex market. However, some traders find opportunities by exploring less popular pairs.

The timeframe for trading is another key factor that will impact the strategy used.

To avoid sharp price swings overnight, many short-term forex traders start fresh each day. They close out all positions before the end of the day, regardless of where they stand. This practice is known as day trading.

Others engage in swing trading, which aims to hold positions for a little longer, usually two to fourteen days.

Longer-term investors employ strategies like position trading, where traders hold positions for months or even years. They aim to avoid reacting to fluctuations in the market.

Different types of trading

Not all forms of forex trading are reactive, responding to price movements. Some are proactive, where traders forecast the direction they believe a particular currency will take.

This includes range trading, where traders identify previous support and resistance levels, hoping they will reappear. It also includes momentum trading, where traders assume a significant price movement signals the start of a longer-term trend.

Currencies that fluctuate in value but lack a discernible long-term trend are the primary target of range trading.

Comparing technical and fundamental analysis

To learn more about the current state of the forex market, traders tend to combine both types of analysis, fundamental and technical.

基本面分析

Is entails assessing the various outside factors and events that affect currency prices, including monetary and governmental policy, the status of the economy and 金融市場, and more.

技术分析

Focuses exclusively on the price of a currency pair and forecasts future forex market movements by identifying patterns and trends from past price charts and statistics.

In short, fundamental analysis seeks to determine if a currency is overpriced or underpriced by evaluating its true value based on external factors that affect price fluctuations.

It focuses on factors that affect the price rather than the price itself.

On the other hand, 技術分析 ignores everything else as unquantifiable information and concentrates solely on price. Understanding supply and demand with the hope that past market patterns will recur.

Forecasting forex movements with fundamental analysis

As the name implies, this focuses on analysing the market’s fundamentals while taking into account all the variables that affect exchange rates, ranging from governmental and monetary policy to the status of the labour and housing markets.

基本面分析 is based on the idea that it can identify when a currency is mispriced. It assumes the market will eventually correct this mispricing. This contributes to the general superiority of fundamental analysis in forecasting longer-term price movements.

Key drivers of the price of currencies

There are some main drivers that traders should always pay attention to when conducting fundamental analysis.

Economic health

Economic growth is the condition and performance of a nation’s entire economy, as measured by statistics such as GDP, which indicates whether the economy is expanding or contracting and at what rate. An improving economy typically results in a stronger currency because it draws investors to the financial markets, forcing traders to use local currency to purchase stocks or other financial assets within the nation.

Inflation - (通货膨胀)

The rate at which prices for goods and services are increasing influences a nation’s monetary policy, including the possibility of interest rate increases, which in turn impact exchange rates. The retail price index (RPI) and consumer price index (CPI) are the primary inflation indicators to take into account.

Interest rates

One of the main factors influencing the forex market is interest rates. Higher interest rates typically result in a stronger currency because, once more, they entice investors to put their money into savings accounts or other financial instruments in order to take advantage of the higher savings rates available, which raises demand for local currency.

Trade and capital balances

Because the forex market is global in scope, shifts in the volume of money coming into and going out of a nation will have an effect on its currency.

For instance, if a nation’s exports decline, its currency will also decline. In terms of capital, any indications that traders and investors are withdrawing their funds from the nation may indicate a shift in public sentiment, or the opposite may be true if investment is increasing.

Employment and wages

Employment levels and the overall health of an economy are closely linked, but wage movement is equally important.

Stalling wages can indicate that disposable incomes and the public’s personal financial situation are not doing as well, even though increasing employment indicates that an economy is improving (or vice versa).

Geopolitics

The forex market is influenced by political developments in addition to the vast amount of economic data.

Because currencies represent their nation, changes in the political status quo can affect the exchange rate. International relations and government politics play a key role in shaping these movements.

Making forex predictions with an economic calendar

Thankfully, forex traders can stay informed about developments and prepare for key events that affect currency prices. At least the ones that are planned, using a simple method.

For anyone trading forex, an economic calendar is essential. It serves as a guide to the major political and economic events that are likely to impact forex and other financial markets in some way. IronFX’s economic calendar outlines the upcoming events that traders need to consider.

The release dates of key economic data and other major events are also detailed here. These include international political gatherings or speeches by world leaders and central bank heads, such as those from the Fed, ECB, BoE, and BoJ.

It’s important to remember that different economies are shaped by various external factors. Information considered significant in one country may not be in another.

For instance, the performance of the UK service sector has a greater impact on forex than it would in a country like China. This is because services dominate the UK economy, while China’s economy remains centred on manufacturing.

Making forex predictions with technical analysis

Technical analysis is not concerned with the causes of price movements, whereas fundamental analysis seeks to determine the factors that will influence future changes in exchange rates. Price charts, which display an exchange rate’s historical performance, are used for all technical analysis. Supply and demand are at the heart of technical analysis, which uses a range of tools to identify historical trends and patterns with the hope that they will happen again.

According to technical analysts, a chart can reveal a lot about the market’s mood and any shifts in sentiment. The goal is to find them before they occur and grasp opportunities in a timely manner.

The most common applications of technical analysis are in short-term trading strategies like swing or day trading. Technical analysis can be done in various ways.

However, analysts frequently use certain historical data points, such as the opening price, highest price, lowest price, and closing price.

When performing technical analysis, analysts often regard these as standard parameters.

Why Forex Traders Must Combine Technical and Fundamentals

As a closing remark, to trade the foreign exchange market, investors require every possible tool. For those who are just starting out in the forex market, the sheer volume of tools and data required to trade successfully may seem overwhelming.

Most forex traders are familiar with technical analysis, and everyone else can readily access the general fundamentals that impact the forex market as a whole, such as GDP data.

Forex traders should use both types of analysis, with technical analysis showing the impact of previous events and fundamental analysis searching for possible reasons why an exchange rate might move in the future. This also lessens the individual shortcomings of each.

For example, fundamental analysis is often criticized for what is known as a “random walk.” In this, analysts try to link a news article or data flow to past price movements without knowing if it actually caused those movements.

On its own, technical analysis cannot give traders a competitive advantage because other market participants also use it.

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Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.