FOREX forecasting helps a trader
predict price movements in the highly volatile FOREX market. The trader can
forecast market behavior either through technical analysis or through
fundamental analysis, though some traders use a mixture of both to get the best
results.
Fundamental analysis
is used to forecast
future price movements. It uses economic, political, environmental and other
relevant data that can impact the supply and demand of a financial instrument.
This type of analyst has to be well
versed with the market as they has to strategically assess where a currency
should be trading based on external factors – which are always unpredictable --
and not on the current price of a currency.
Technical analysis
uses the past market action to
create charts that can be used to forecast market movements. Thus, it is
strictly based on facts rather than hypothetical analysis.
One major advantage of technical
analysis is that experienced analysts can follow many markets and market
instruments simultaneously. It is based on the following three principles:
1. The actual price is a reflection of
factors known to the market. There are therefore no surprises, and the analysis
is based on actual price movements.
2. Market behavior shows distinct
patterns. The technical analyst therefore looks for these patterns knowing that
when the patterns repeat the results will be the same.
3. FOREX patterns reflect human
psychology. Historically, they show that humans behave in the same manner.
Technical analysts use five distinct
theories to make the forecasts. These are:
Indicators
(oscillators such as Relative Strength Index theory),
Number theory
(Fibonacci numbers, Gann numbers), Waves (Elliott wave theory),
Gaps
(high-low, open-closing theory)
and Trends (following the moving
average theory).
However, irrespective of the method
used a great deal of data goes into making a forecast. The developments of new
software tools, and availability of historical data, have made FOREX movements
more precise.
There is also a greater stress on
analysis now as compared to the past, when the traders only went by gut feeling.
