There are two methods of analysis that can be used to forecast the behavior in the forex markets. The first method used to perform a forex forecast is technical analysis and the second is fundamental analysis. In today’s article we will provide information on both methods as well as the tools associated with each method.
Fundamental and technical analysis both operate with the same goal. That goal is to predict price movements when trading forex. Fundamental analysis is used to conduct a forex forecast by analyzing the economic and political status of a country’s currency as well as understanding the attitudes of the traders who participate in and conduct forex trading. Fundamentalists will evaluate a country’s economy by looking at the rate of inflation, interest rates, taxes, and unemployment rate, among other things. They also evaluate a country’s political stability as it relates to any potential causes of market movement. Fundamental analysis is considered to be a macro or strategic assessment of where a country’s currency should be trading based only on the above criteria and not on the movement of the forex currency price itself.
Technical analysis is also used to determine a forex forecast and is a much more statistical and mathematical method. The price is analyzed when using this method in order to predict future price movements of currencies. This method is built on three principles discussed below.
1) Market action discounts everything. This means that the price of a foreign currency is an indication of anything that could possibly affect the market. Reasons could include criteria looked at using fundamental analysis, but with technical analysis traders don’t look at “why” but instead only focus on the actual price movements to obtain their forecast.
2) Currency prices move in trends. Technical analysts conduct trend analysis through identifying patterns. The patterns have consistently produced the same results in the past and therefore must be indicative of the same results in the future. Again, they don’t look at “why” but instead only follow the trends expected to achieve the same results.
3) History repeats itself. This means that trends will repeat themselves as well. The human psyche while continuously evolving, changes little over time. With this in mind, trends will change little over the period of 100 years and have been studied to show this. Stock price factors as well as foreign currencies factors will change little over time, only reaffirming the need to follow the trends.
When performing a forex forecast there are technical analysis tools available. The use of forex charts is one tool and there are five categories using the forex technical analysis theory.
1) Indicators (Relative Strength Index (RSI) is one example)
2) Number Theory (Fibonacci indicators)
3) Wave (Elliott wave theory)
4) Gaps (open-closing and high-low)
5) Trends (following moving average)
For those interested in learning more about the forex markets, take a deeper look at the most important technical analysis tools described above and find some technical analysis courses that you can take online. The ability to make market predictions and obtain a forex forecast is a skill that requires extensive knowledge and a lot of practice by the forex investor.