When it comes to trading foreign exchange, it’s tempting to look for a solution that can take the guesswork and unpredictability out of the markets.
The ups and downs of the forex market are particularly pronounced, and the volatility level can often come as a surprise to those who are used to trading arguably more sedate asset classes such as government bonds.
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| How Can You Predict Movements in Forex Markets?: eAskme |
However, the bad news is that there’s no such thing as a wholly accurate way of predicting how the foreign exchange markets might move.
It makes sense: if there was a way to predict it with some accuracy, then everybody would do it, and the risk-reward system on which it relies would collapse! Also there are forex signals which predict the price of the markets.
The good news is that there are some ways to make educated and informed predictions that can form part of your overall strategy and hopefully enhance the chances of making a good trade.
Here’s how.
Price charts
Perhaps the most common way to make some educated prediction about the direction of the foreign exchange market is to use a price chart.
Price charts track how much an asset like a forex pair is being bought and sold for at any one time.
Price charts are well worth looking at if you’re thinking about where to go next with trade, as they can often illustrate helpful trends.
Your broker often supplies these charts through their platform, and it’s a good idea to get a forex broker rating from long-standing sites like ForexFraud before you open an account.
That way, you’ll be able to see whether the trading platform or software offered by your potential new broker is advanced enough to offer the price chart analysis features you need, such as candlestick chart tracking.
When analyzing a price chart, there are several potential clues available. Remember, though, that price charts are not always entirely accurate as predictors.
Therefore, it’s often worth backing up your insights by taking a second view.
For example, if an intraday chart suggests that a pair might go down in price, a longer-term one-year view might suggest a different underlying sentiment.
By combining these clues, you can make a more informed decision about what to do.
Fundamental analysis
Another way to attempt to predict how the forex market might move next is to use fundamental analysis.
This considers more than mere price chart data and analyses, including events that are going on in the wider economic and political worlds.
For example, central bank announcements such as changes to interest rates can often affect the forex market, so an upcoming meeting of – say – the Federal Reserve Open Market committee ought to be factored in by anyone looking to make a prediction.
Traders can access this sort of information via an economic calendar. Such calendars are usually available online and can be accessed for free with just a few searches – or, perhaps, via your broker if they have an education section.
Don’t forget to also look for political events.
General elections tend to be the sort of events that can shift the markets, so it’s wise to factor this sort of market-mover in as well.
Expert advice
Some self-proclaimed experts claim to help predict market movements and offer this prediction as a service. In some cases, this might be useful to a trader.
Experts can synthesize fundamental data, apply learnings accumulated over a long period to the facts presented in front of them, or essentially act as an outsourced analyst able to do the legwork of technical analysis.
It’s wise, though, to always be wary of what experts claim.
A trader should exercise extreme caution before going ahead with an expert advice provider, as there is the possibility it can be a sham.
If an expert promises to deliver lots of returns for little effort or charges a very large amount of money, it may be a scam.
If it sounds too good to be true, it may be – so always do your research before you move ahead.
Remember: strategy is key.
Finally, it’s important to get your forex trading mindset right before starting using the tools outlined above to make predictions.
Rather than seeing the tools described here as prediction methods on which you can rely, it may make more sense to see them as parts of a wider strategy.
Take the example of a price chart. A price chart is a supplier of information, but you have to perform another action on it once it’s provided you with the information.
You have to interpret it for your purposes and decide what to do with the information.
A price chart may show you that there’s been a long-term decline and a short-term rise in the price of an asset, but this information is useless as a predictor without an overarching strategy in place.
Only those following a day trading strategy are likely to open a position off the back of information like this – and without that larger framework, predictions aren’t much use.
So, in short: rather than relying simply on tools as prediction generators, it’s best to see the tool you use – or, ideally, more than one of them – as different strands feeding into your own wider strategy.
Trading forex online can be hard work, and it’s not made any easier because the foreign exchange market is one of the most volatile markets.
However, it’s possible to reduce the risks posed by this volatility by using some of these tools, such as price charts, fundamental analysis, and more, to feed some educated predictions into your overall strategy.
If you still have any question, feel free to ask me via comments.
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