Businesses that are involved in global trading need to be able to predict Forex market behavior. This ability is essential when concluding deals and arranging for payments to protect themselves from possible adverse outcomes of Forex market behavior or to gain from positive situations. Trying to predict a market is a complex exercise and requires the use a scientific basis rather than guesswork to predict Forex market behavior.
This article on forecasting the behavior of the Forex market will educate you on two methods of analysis. Both methods – Technical analysis and Fundamental analysis – have vast differences between their approaches although their goal is the same. They can be very effective in predicting the movement of the Forex market. To get the best outcome, fundamentalists suggest combining both of them for better results.
Primarily, there are 2 methods for predicting Forex market trends:
● Technical Analysis
● Fundamental Analysis
There is no judgment possible on which of the two methods is more reliable. They vary in approach and use different parameters to predict the price or a price movement. In essence, we can say that a Technical analyst will focus on the outcome i.e. the price or the movement expected, and a Fundamental analyst will put emphasis on the “Why” of the price or the movement expected. A Technical analyst believes that over and above the fundamental analysis, other factors need to be taken into account before coming to a conclusion. A judicious mix of the two approaches is sound, as it is important to know the cause and the effect i.e. the price or the movement expected taking into account the factors affecting it.
Let’s try and understand how these two approaches work.
Technical Analysis
The Technical analysis method focuses on understanding the prevailing market trends and tries to pinpoint any reversal of this trend and predict how the Forex market is likely to behave in the future. It is more statistical in nature in the sense that this method relies heavily on historical data of prices and volumes traded using charts to understand and interpret the market’s behavior. There are many mathematical tools available for making such analysis like various indicators, Number Theory, waves, gaps and trends etc.
A Technical analyst prefers not to waste his time finding out how the market ought to have behaved and why it did not. A Technical analyst looks only at what has happened and what is the take-out from that behavior. This method believes that the historical movements of the prices tell a story that needs to be understood.
Advocates of this method also believe that such study of price movement is more useful when referring to a situation where price movements are caused by a free market situation i.e. where demand and supply determine the rate and movement and not where exchange rates are fixed artificially. (An example would be when the Malaysian ringgit (MR) was once pegged to the United Stated dollar (USD) by the Malaysian government at 3.76 MR to a USD.) The Technical analysis method tries to understand the “market sentiment” or the emotional reaction of the market as opposed to the sentiments of the individual participants in the market.
In essence, Technical analysis is underscored by three basic assumptions:
● The market discounts everything. That is to say all the happenings in the economy – let's say the global economy – whether they are political events, statements by economic gurus, a security situation, crop failures or the collapse of a bank – everything affects the Forex market and has affected the prices prevailing in the market.
● Prices move in trends. This means that there is a pattern to the price movements that needs to be studied. These price movements tell us something about the existing trends and allow us to make predictions.
● History repeats itself. Mass thinking does not change dramatically over periods of time and the “wave” of mass psychological thinking moves in a familiar pattern. Only, the same needs to be understood and applied in practice.
Fundamental Analysis
As the name suggests, this method of analysis focuses on the “fundamental” factors that are known to affect or ought to be affecting Forex market rates. This method is a bit traditional in approach and is typically theoretical in nature. For instance, typically, when a Fundamental analyst is asked to predict the Forex market rates, would look at existing and expected interest rates, GDP growth rates, inflationary trends, weather changes affecting agricultural output, international trade balances, exchange rate policies of the countries involved, capital market status etc. before saying, “I believe given these indicators, the Forex market ought to be behaving in this way” and would conclude whether a currency is likely to appreciate or depreciate vis-a-vis the other one. Not surprisingly, when the market rate determined is at variance with the prediction, a Fundamental analyst looks flummoxed.
This type of analysis fails to take into account that there is also something called “market sentiment” – simply because such a factor is not “fundamental” to the analysis because it is not predictable and not driven by rationale.
Conclusion:
Having considered both approaches, we can only say that each method has its merits and demerits.
However, smart Forex market operators prefer to use a good mix of these two methods, apply their judgment and make calls on how the market is likely to behave and take actions as deemed fit for their business.
