Forex Forecast

# Forex Forecast

## Tuesday, 6 March 2012

**Forex forecasting**

Basic Forex forecast methods: Technical analysis and fundamental analysis

This
article provides insight into the two major methods of analysis used to
forecast the behavior of the Forex market. Technical analysis and
fundamental analysis differ greatly, but both can be useful forecast
tools for the Forex trader. They have the same goal - to predict a price
or movement. The technician studies the effect while the fundamentalist
studies the cause of market movement. Many successful traders combine a
mixture of both approaches for superior results.

Technical
analysis is a method of predicting price movements and future market
trends by studying charts of past market action. Technical analysis is
concerned with what has actually happened in the market, rather than
what should happen and takes into account the price of instruments and
the volume of trading, and creates charts from that data to use as the
primary tool. One major advantage of technical analysis is that
experienced analysts can follow many markets and market instruments
simultaneously.

Technical analysis is built on three essential principles:

1.

**Market action discounts everything!**This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2.

**Prices move in trends****Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.**
3.

**History repeats itself**Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.
Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:

**Indicators**(oscillators, e.g.: Relative Strength Index (RSI)**Number theory**(Fibonacci numbers, Gann numbers)**Waves**(Elliott wave theory)**Gaps**(high-low, open-closing)**Trends**(following moving average).

Some major technical analysis tools are described below:

Relative Strength Index (RSI):
The
RSI measures the ratio of up-moves to down-moves and normalizes the
calculation so that the index is expressed in a range of 0-100. If the
RSI is 70 or greater, then the instrument is assumed to be overbought (a
situation in which prices have risen more than market expectations). An
RSI of 30 or less is taken as a signal that the instrument may be
oversold (a situation in which prices have fallen more than the market
expectations).

**Stochastic oscillator:**

This
is used to indicate overbought/oversold conditions on a scale of
0-100%. The indicator is based on the observation that in a strong up
trend, period closing prices tend to concentrate in the higher part of
the period's range. Conversely, as prices fall in a strong down trend,
closing prices tend to be near to the extreme low of the period range.
Stochastic calculations produce two lines, %K and %D that are used to
indicate overbought/oversold areas of a chart. Divergence between the
stochastic lines and the price action of the underlying instrument gives
a powerful trading signal.

Moving Average Convergence Divergence (MACD):
This
indicator involves plotting two momentum lines. The MACD line is the
difference between two exponential moving averages and the signal or
trigger line, which is an exponential moving average of the difference.
If the MACD and trigger lines cross, then this is taken as a signal that
a change in the trend is likely.

**Number theory:**

Fibonacci
numbers: The Fibonacci number sequence (1,1,2,3,5,8,13,21,34...) is
constructed by adding the first two numbers to arrive at the third. The
ratio of any number to the next larger number is 62%, which is a popular
Fibonacci retracement number. The inverse of 62%, which is 38%, is also
used as a Fibonacci retracement number.

**Gann numbers:**

W.D.
Gann was a stock and a commodity trader working in the '50s who
reputedly made over $50 million in the markets. He made his fortune
using methods that he developed for trading instruments based on
relationships between price movement and time, known as time/price
equivalents. There is no easy explanation for Gann's methods, but in
essence he used angles in charts to determine support and resistance
areas and predict the times of future trend changes. He also used lines
in charts to predict support and resistance areas.

Waves
Elliott
wave theory: The Elliott wave theory is an approach to market analysis
that is based on repetitive wave patterns and the Fibonacci number
sequence. An ideal Elliott wave patterns shows a five-wave advance
followed by a three-wave decline.

Gaps
Gaps
are spaces left on the bar chart where no trading has taken place. An
up gap is formed when the lowest price on a trading day is higher than
the highest high of the previous day. A down gap is formed when the
highest price of the day is lower than the lowest price of the prior
day. An up gap is usually a sign of market strength, while a down gap is
a sign of market weakness. A breakaway gap is a price gap that forms on
the completion of an important price pattern. It usually signals the
beginning of an important price move. A runaway gap is a price gap that
usually occurs around the mid-point of an important market trend. For
that reason, it is also called a measuring gap. An exhaustion gap is a
price gap that occurs at the end of an important trend and signals that
the trend is ending.

Trends
A
trend refers to the direction of prices. Rising peaks and troughs
constitute an up trend; falling peaks and troughs constitute a downtrend
that determines the steepness of the current trend. The breaking of a
trend line usually signals a trend reversal. Horizontal peaks and
troughs characterize a trading range.

Moving
averages are used to smooth price information in order to confirm trends
and support and resistance levels. They are also useful in deciding on a
trading strategy, particularly in futures trading or a market with a
strong up or down trend.

The most common technical tools:

**Coppock Curve**is an investment tool used in technical analysis for predicting bear market lows.

**DMI**(Directional Movement Indicator) is a popular technical indicator used to determine whether or not a currency pair is trending.

Unlike
the fundamental analyst, the technical analyst is not much concerned
with any of the "bigger picture" factors affecting the market, but
concentrates on the activity of that instrument's market.

Fundamental analysis
Fundamental
analysis is a method of forecasting the future price movements of a
financial instrument based on economic, political, environmental and
other relevant factors and statistics that will affect the basic supply
and demand of whatever underlies the financial instrument. In practice,
many market players use technical analysis in conjunction with
fundamental analysis to determine their trading strategy. One major
advantage of technical analysis is that experienced analysts can follow
many markets and market instruments, whereas the fundamental analyst
needs to know a particular market intimately. Fundamental analysis
focuses on what ought to happen in a market. Factors involved in price
analysis: Supply and demand, seasonal cycles, weather and government
policy.

The fundamentalist studies the cause of
market movement, while the technician studies the effect. Fundamental
analysis is a macro or strategic assessment of where a currency should
be trading based on any criteria but the movement of the currency's
price itself. These criteria often include the economic condition of the
country that the currency represents, monetary policy, and other
"fundamental" elements.

Many profitable trades are made moments prior to or shortly after major economic announcements.

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