In general, whether it is stocks, currency or even futures, the trading market is under numerous influences that are outside the control of any person or institution. However, the Foreign Exchange (Forex) market has almost always incorporated instability in its day to day operation.
The value of a currency is relative to that of the others. The rules of supply and demand, politics, economic factors and policies by the central banks can all impact the value of the currency, in turn affecting them all.
Moreover, currencies tend to be heavily correlated with the value of goods produced by a country’s economy. This is true for some currencies more than for others. The Swiss franc, for example, is valued because it is considered a currency that is “safe” for deposits. The demand for it is high, disconnecting the coin from its national economy.
Setting Your Foundation
To operate on the Forex market, you first need to pick out a broker. This is of the utmost importance as the broker is the one through which you act on the market. While the biggest brokerage firms span across numerous countries, with offices in each, and cover a wide variety of trades, small ones have to specialize. For this reason, it might be better for you to choose the broker that suits your trading strategy best.
The second part of your foundation is to establish your currency pair and the economic indicators that you are going to follow. At this point, you should gather as much information you can about the way in which the market reacted in the past (historical data) and the present developments (trends).
History tends to repeat itself in the Forex market. If the market reacts in a certain way when specific conditions are met, chances are it will do so again. The game, then, becomes a matter of predicting when these conditions or events will surface again. The most obvious example consists of economic crises and the conditions they create on the Forex market.
Making The Prediction
We have established that historical data is a useful indicator of future behavior. For prices, the most important thing to follow is the Moving Average Indicator. It recounts the evolution of prices over a set period by following its arithmetic mean. While largely irrelevant on extremely long periods of time – years, decades – the moving average is of paramount importance for shorter periods, months in particular.
[pullquote]In prolonged times of stability – understood here as the absence of a full-blown economic crisis – the moving average sets the highs and lows of currency, directing support and resistance points.[/pullquote] While the move from high to low and back is “natural” on the Forex market, it can also be hastened or pushed in the opposite direction by certain events.
These can range from executive instability, political coups to a declaration from a central bank official or, most recently, an election that produces a hung parliament, as we have seen in The United Kingdom.
To all these events, the moving average reacts visibly. This was the case in the aftermath of the 2008 economic crisis when countries trembled before rating agencies that could downgrade their economies. This downgrade was almost certainly followed by a weakening of the national currency and subsequently – goods and services that held lower value on the international market.
To make a prediction, you need only decipher the cues taken by the market and the extent of its reaction. However, this is far more complicated than it may seem at first glance. While the market may wholly ignore an event that should impact the moving averages of certain currencies, it may also be permeated by panic as a result of a simple rumor.
The Three Times Of The Market
The data you choose to follow in order to predict future movements of the market can, therefore, be split into three – historical indicators (past), economic indicators (present) and movement oscillators (future). Together, they show you the way in which the market reacted to certain factors in the past, when those factors might reconvene today and finally what are the tendencies within the market.
Timing is everything in this respect. Price momentum, following the stochastic or RSI indicators, shows you current tendencies, but not their strength or duration. Purchasing a position now might prove a loss, if the trend slows or even worse, reverts. Similarly, closing your position too soon might mean losing prospects of immense winnings.
Trading presents a contradiction at its core. With every trade, the market requires us to make a prediction – this currency will rise in value, the other will drop. At the same time, through its very nature, it makes prediction nearly impossible.
A definitive and failsafe way of predicting price shifts in the Foreign Exchange market is a longstanding dream for traders. However, its impossibility has been long embraced by the professionals. Instead, their efforts have been concentrated into identifying the proper indicators of the three times of the market.
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