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One thing that attracts many traders to the forex market is the fact that they get an opportunity to make a profit from both rising and falling markets. If the price of a currency pair is rising, they can make a profit by going long or in other words, opening a buy position. If the price is about to fall, they can open a sell position for shorting and gain from the downtrend. The task of making accurate predictions about the potential price movements can be complicated for a beginner. Thankfully, trading platforms like MT4 and MT5 offer a lot of analytical tools to make things easier and MT5 is the perfect software for those who want advanced features along with a superior trading experience.
But just having a set of tools is not enough to anticipate the market fluctuations with accuracy as you also need to follow the right approach for making precise predictions. In this article, I will be teaching you about the best approaches for predicting price movements in the forex market.
- Fundamental Analysis
The trading instruments in the forex market are international currency pairs, representing the value of one currency against the other. The value of a currency can be affected by many factors as they are linked to the economy of a country. In the case of a currency pair, there are different currencies and the price will be influenced by any economic or political event that affects the countries that they belong to. The micro and macroeconomic factors are going to impact the currency pair price in one way or another.
Hence, fundamental analysis focuses on these factors and tries to assess what kind of price movement can be triggered by an economic data release, news event or a change in the monetary policy of an economy. The prediction about the direction in which the prices will move after an economic event will be decided based on whether the currency is going to appreciate due to the event or if it will lead to a drop in the currency’s value.
Anything that indicates the strength of an economy will lead to an increase in the currency value and if the economic data releases reveal weakness in the economy, the currency will become weaker against the currency of an economy that is doing better in comparison. For instance, GDP is a key indicator of economic well-being and a higher GDP can be interpreted as an influential force for currency appreciation. A higher interest rate for investments will also lead to a rise in the value of a currency as more capital will flow to the country.
If there is a rise in the unemployment rate, it suggests weakness in the economy and this can lead to a drop in the currency’s value. Another sign of a potential price fall in the forex market is a trade balance deficit which means a country has more imports and exports. CPI that shows a higher rate of inflation can also lead to the weakening of a currency and if the inflation rate is dropping, it is a good sign as the economy is recovering. The interest rate policy of Central Banks also gives clues about the economic situation and potential currency price movements.
In short, fundamental analysis is done by considering all the economic and geopolitical aspects that can cause a change in the price of a currency pair. Then you predict the price movement based on this analysis. But keeping track of all these aspects can be tough at times and not all of them may be relevant for those who trade shorter timeframes. In this case, the next approach will be easier to follow.
- Technical Analysis
Technical analysis is something that every forex trader needs to learn about as this is the typical method for finding ideal trade setups for your strategy. The price fluctuations of a currency pair will be plotted on a chart and the patterns in which the prices are moving give valuable insights about the market situation. The patterns in which the prices move are repetitive and it is possible to predict the next price point based on the pattern that you detect on the price chart.
However, mastering technical analysis takes a lot of practice as well as continuous learning and I will suggest you make use of a demo account for evaluating your technical analysis skills by placing trades based on your analysis. Demo accounts are perfect for developing your skills in a risk-free space and you also get the opportunity to trade in real-time market conditions. When it comes to accessing a demo account, the MT4 trading platform seems the most suitable platform due to its user-friendly interface and all the necessary features. Visit this website to access the platform to practise trading. Now, some important technical terms that you need to learn for technical analysis include support and resistance levels.
Support is the level at which the price starts rising again as the price cannot drop beyond that level. Resistance is the level at which the price stops rising before it starts dropping. Support is the peak low price whereas resistance is the peak high price. A pattern that shows higher swing highs and higher swing lows, indicates an uptrend and when there are lower highs and lower lows on the chart, we can call it a downtrend. There is also a sideway trend with only horizontal price movements as the market is stuck in a tight range due to choppiness or consolidation.
The price patterns not only show the trends but also show potential reversal points when the trend is about to shift. Technical analysts often look for specific patterns to confirm the continuation of a trend as well as trend reversals. Sometimes, the trend may pause for a while due to a brief pullback, but it resumes if there is enough momentum that show the strength of a trend. Those who are good at technical analysis can make precise predictions by considering all these aspects.
Besides learning chart reading and pattern recognition, you should also use some reliable technical indicators like Moving Averages, RSI and MACD to confirm the analysis. Identifying a pattern is not enough to make a correct prediction as how you interpret it is more important for taking the best course of action for the situation. In technical analysis, you can also select a particular timeframe like data for a single minute, a few minutes, a few hours and an entire day or even weeks, months or years.
Traders who prefer shorter timeframes mostly rely on technical analysis alone while those who trade longer time frames also consider fundamentals. Regardless of your trading style, you need to keep an eye on the news and utilise the economic calendar to avoid sudden volatility caused by any major economic event or data release.
Managing the Risk
One thing to remember while trying to predict a potential price movement is that your analysis may go wrong due to the unpredictable nature of the forex market. Hence, you need to play it safe by focusing on risk management while planning and executing your trades. You need to find the best price points for entry and also make a plan for automated exit by placing a stop loss and take profit orders at different price levels. This will help you to avoid losses or secure profits if there are any sudden reversals or market shifts. Take Profit levels are used to exit winning trades after gaining enough profits and stop loss levels are for closing losing trades early.
You can also use various tools like trading calculators to calculate the most favourable price levels for executing your trades with greater ease and precision. They help you to get the required metrics in no time and this way, you can make informed trading decisions real quick. While you spend time on market analysis and trade planning, it is important to enter trades at the right time as the forex market is constantly moving. This does not mean that you need to rush the trading process as being impulsive can lead to major mistakes. You need to make sure that you have a solid strategy and a risk management plan.
The Bottom Line
In a nutshell, predicting the price rise or price fall is not an easy task in the forex market. Before forecasting, you need to monitor the market and wait for it to respond to a situation as it gives you a clearer picture of a possible scenario. Another thing to remember while anticipating a price movement is that you need to let go of the directional bias and other emotional aspects that can overpower your logic as they stop you from making a rational decision. It all comes down to continuous learning and practice as you get better at analysis and predictions with experience.
Finding the right approach for price predictions and selecting a suitable strategy for trading are the key steps towards success in the forex market. It is also a matter of choice as some traders prefer to depend on fundamental analysis while a lot of traders only consider technical analysis. Professional traders often strike a balance by combining both of these approaches.
