The forex market is a very complicated one and it takes a practiced eye to analyze, interpret and understand the many areas and mountains of data that one should analyze to accurately predict forex market trends. But at the same time, there are thousands of forex traders and brokers who do exactly this every day. Not all of them are successful – some want to get in for the “quick financial kill” without doing as much analysis of the data that should be done, and they lose their shirt on a very regular basis.
Generally speaking, there are two basic trains of thought on the best way to forecast the forex market and forex rates. The most successful forex traders use a combination of both methods, but the two methods are the technical analysis and the fundamental analysis.
The technical analysis approach looks at past forex market action and tries to extrapolate that data to determine what will happen in the future. From a human perspective, this works very accurately, since how you reacted to a certain situation in the past is pretty much the same as how you would react to it in the future. The forex market is very similar in this respect, since much of the forex market is dictated by human factors, and how people reacted to something in the past is generally a very good indicator of how they will react to something in the future. Not always, but generally speaking.
By contrast, using the fundamental analysis approach to predict the forex market looks at things a bit more in depth. At the same time, it is really looking at very similar data in a different way, so this method can be as accurate as the technical approach. Via fundamental analysis, many different factors are considered such as political events, the amount of government involvement in the different countries, and what is happening socially and economically in the country at the current time.
A forex trader who is very good at fundamental analysis might forecast that the forex market will drop because his research shows that the government is currently very unstable, or it may increase if a popular new leader was just elected into office. Basically, anything that happens within the country that has an impact on that nation’s economy will likely also have an impact on the foreign currency exchange rates.
As stated earlier, the most successful forex traders will use a combination of these two methods to attempt to predict how the forex market will fare. But one of the problems that is faced by all traders is that having this kind of in-depth knowledge of so many different factors for several different countries at the same time is a daunting task. The top forex traders have largely turned to technology, using tools that can analyze these mountains of data to produce summaries that trading decisions can be based on.
This use of technology allows them to look at many more factors, make decisions more quickly, and be in the right place at the right time with their buy or sell decisions. This does not mean they always have successful trades, but for the most part, the use of tools and technology allows them to make many more profitable trades than losing ones.