Forex Predictions: It's This and That
In forex trading, the difference between huge profits and rock bottom losses is this: a very accurate prediction of where currency prices are going.
Of course, you don't have to have very developed psychic powers, or even crystal balls, to make a forex prediction. In actual forex practice, to accurately predict or forecast where a certain currency is going depends only on two types of analyses: (a) technical analysis and (b) fundamental or market forces analysis.
Although both technical analysis and fundamental analysis use charts for forecasting, there are major differences between the two.
Technical analysis basically involves predicting the future by analyzing the past. The "past" in the case of forex consists of price movements and market trends.
Technical analysis is based on the premise that prices in the forex market merely reflect the factors that affect it. These include fundamental factors like inflation, interest rates, etc., as well as other major factors like supply and demand, politics and the general sentiment of the forex market.
Technical analysis only concerns itself with trends or significant patterns in market behavior. Like stock market traders, forex traders recognize that trends in market behavior will produce the expected results, or at least indicate a high probability of it.
Technical analysts work on the premise that history repeats itself and that although circumstances may change over time, the psychology of humans changes little.
On the other hand, fundamental analysis basically concerns itself with how macro factors affect the supply and demand of a currency and the forex market in general. These macro events run the whole spectrum of economic, political, and environmental factors. Fundamental analysis also concerns itself with HOW economic fundamentals (inflation, interest rates and others), supply and demand, and market sentiment affect the market.
It should be noted that many profitable forex trades were made shortly before or after major economic news.
In actual forex practice, many investors use fundamental analysis hand in hand with technical analysis to formulate and implement trading strategies. One plus one: the great advantage of one type of analysis compliments that of the other.
A fundamental analysis studies the causes of market movements and how major economic news affects the market. A technical analysis, on the others, spots and establishes trends on events that have happened.
A forex investor, when he or she hears of major economic news, can analyze how this could affect the buying and selling of a currency. For example, how a bankruptcy declaration by a national government can send forex investors scrambling to sell its currency. Investors can draw from the past to prove this, and pull up charts that reflect the time of a similar case.