When you’re new to the forex markets there’s a lot to take in. Many traders begin by relying on tips, watching the way the markets are moving in real time or copying the actions of successful traders. If you want to be a success yourself however, you’ll need to learn the art of predicting market fluctuations for yourself. This can seem very mysterious and obscure but as this article sets out to demonstrate, it really boils down to some fairly simple techniques.
What shapes the forex market?
At base, the forex market is influenced by networks of supply and demand and the same external economic factors as any other. Sometimes, however, it moves in ways that are puzzling to people who specialise in other areas, such as stock. Why does this happen? It’s because, to put it simply, what benefits a business is not always the same as what benefits a country.
- GDP – when this is high, currencies tend to stay strong. A low GDP, however, does not automatically mean that a currency is worthless, and in fact it’s less damaging to currency than a GDP that fluctuates significantly from year to year.
- Political stability – this gives businesses confidence and tends to keep a currency stable. Instability can lead to falls or rises, depending on the opportunities it creates.
- Military security – any sense that a country is in danger of invasion significantly lowers its currency. Engaging in war at a distance often leads to a short-term rise followed by a fall.
- Monetary policy – because of its major role in decision making by business and private investors, this is vital to market confidence.
- Trade – when trading relationships become less fluid, currency values generally fall.
The simplest way of evaluating the forex markets as a newcomer is by using fundamental analysis. If you’ve previously engaged in another form of trading, then you may already be familiar with this. Essentially, it means using real world data harvested at the time of the trade to assess the health of each currency in a pair and predict how it’s likely to move in the near future. Using it successfully usually requires focusing on a specific area, for instance by tracking currency pairs in a particular geographical region so that you can develop in-depth knowledge of each.
A technique that can be used either alongside or in place of the above (they sometimes yield curiously different results), technical analysis is based on technical indicators and, though it can be done manually, is more often handled by specialist software. Some brokers provide access to software like this as part of their service, though this has the downside that all their other clients might be looking at the same information as you, reducing your advantage. You can also access software like this elsewhere and use it to track all the major currency pairs, drawing on their past movements to better understand how they’re likely to move in future.
Mapping relationships over time
Many people get into forex because they want something they can start to trade straightaway, something that generates immediate results. Short-term trades are common, so why bother analysing long-term trends? The simple reason is that the more you know, the easier it is to predict future developments and to do so with greater accuracy even when looking some distance ahead. To look at it in more depth, the more you map long-term trends the better you’ll understand the long-term patterns in currency relationships that can sometimes lead to shifts invisible to people using only short-term analysis (as many traders do). It can also help you to hone your particular skills and identify the areas where your predictive skills are best, helping you play to your strengths.
Making use of your understanding
Once you learn to predict market fluctuations with some accuracy, you’ll be able to start making more profitable trades, especially if you choose to keep them open for longer. To really do well, however, you should be focusing on trying to predict breakouts. Your day to day market monitoring will soon make you aware that most of the time the markets move in roughly the same ways, with the differences between particular currency pairs staying roughly the same Occasionally there are breakouts, where one currency will suddenly shift out of its usual pattern and rise or fall significantly. It’s here that there are big profits to be made.
Spotting breakouts isn’t easy, and the chances are that you will call a few of them wrong before you get the hang of it, so don’t go betting your house. Just stay sharp because when you identify a good one, you might not actually need to risk that much to do very well indeed.