Forex Forecasts Which Makes Prediction Easy?
Almost all the bests you make in the forex market depend on your ability to do a forex forecasts. So, how do people make forex prediction? Is it that easy? Well, before we get into the details of what this means, we have to talk about some crucial information you will need.
In a market as big and volatile as forex, you will need to adapt to the changes coming at you every minute. Adapt, improvise and overcome. Forex prediction is about knowing certain types of information that will put you in the perfect position when entering trades.
When speaking to pro traders, they will no doubt bring up how good they are regarding forex forecasts. With this article, we are going to prepare you by giving you the ability to make forex prediction and knowing what to look for, when looking into the future.
The Factors Which Control Forex Forecasts
When we talk about forex prediction, we have to acknowledge that a trader needs to comprehensively know all the factors that can affect the way a currency change. You should remember that there is no ultimate formula for you to follow when you want to do forex forecasting.
However, with these factors, you can change as the market does, to make sure you are always well positioned.
- Economic growth
- Monetary policy
- Interest rates
- Geopolitics and politics stability
If you can follow all the events and have notifications tailored to give you the news instantly, you will have a better chance of doing very accurate forex forecasts. However, keeping your eye on all the macro and micro factors is difficult.
One thing you should do is avoid sites that claim to give free forex forecasts. If you want to track information for your forecast prediction, you should probably rely on the Forex Calendar. It will provide you with announcements, forecasts and other important information real-time.
That way, your forex forecasts can be more accurate, and with time, you can learn to spot and relate events to what effect they will have on the market, as soon as the notification drops.
Trends are Inextricably Tied to Forex Predictions
Identifying trends is one of the core skills that any forex trader will need when making forex prediction. It is instrumental because when you know the general direction a market or asset will take, you will be able to become highly profitable.
In trading strategies, it is always best to trade with the trend. Spotting trends is a segue into making an accurate forex prediction.
For example, when you see a trend moving, it is best to be cautious about taking a position that depends on the trend moving in the opposite direction. Trends apply to interest rate, yields and equities just like any other markets.
Their characterization is by price or volume. When you know how all that works, it is not hard to tell where you will head next. In all essence, that is what forex forecasts are all about.
To recall your forex education, there are three types of trends that you need to keep your eye on:
- Sideways trend
With these three, let’s delve into an example that will make them so much clearer.
When there is a trend moving up in the charts or graph, the chosen currency is increasing in value, and a downtrend means the opposite. With that, you have made a forex forecasts. The sideways trends suggest that the currencies or assets are not appreciating or depreciating.
Knowing what the trends mean is very important when making a forex prediction.
The Three Most Common Ways to Make Forex Forecasts
There are three popular ways for you to use when you want to learn how to make forex prediction like the pros. Let’s take a look at them.
1. Purchasing Power Parity (Also Known As PPP)
This is the most popular method because of how much it is included in textbooks. With the PPP method, you will aim to do your forex forecasts by using the theoretical law of one price. The law states that:
Identical goods in different countries should have different prices.
Let's talk about that a little more. A pencil in Canada should be the same price as a pencil in the U.K. That is after you consider the exchange rate and the transactions and shipping costs. Forex prediction occurs when you realize that the law demands that there should be no arbitrage.
There should not be an opportunity for someone to buy inexpensive pencils in one country and sell them to a different country for profit.
The PPP methodology does forex forecasts that exchange rates offset the price changes. The change is attributed to inflation, based on the underlying law of this approach. Let’s look at this mathematically.
If we expect that the pencils in the U.K. will increase in price by 4% over the coming year and prices in Canada will only rise by 2%, the inflation between the two is calculated as follows:
The cost of pencils in the U.K. will increase faster than in Canada. With PPP, in this situation, you can make your forex forecasts that the Great British Pound will have to depreciate by 2% to make the price between it and the Canadian Dollar, equal.
So, if the currency exchange rate is 90 cents of U.K. money for one Canadian Dollar, the PPP forex prediction would then give you an exchange rate of (1+0.02)×(UK GBP0.90 per CA $1)=GBP $0.92 per CA $1
Now, in this situation, it will require 92 cents of the GBP to buy one Canadian Dollar.
Fun Fact: The Big Mac Index is a humorous way to know whether a currency is undervalued or overvalued. Because Big Macs are now nearly universal in all countries they are sold, the comparison of their prices is the basis of this fun index.
2. Relative Economic Strength
The RES approach is all about using the strength of economic growth in different countries, to make a forex forecasts and predict the direction exchange rates could take. The logic used in this approach is that a robust economic environment translates to more growth and is more likely to attract investments.
Foreign investors are the most likely choice to move in; the forex prediction here is all about what that means. For the foreigners to purchase the investments in the country they move to, they will have to exchange their native country's currency, and that will no doubt create demand.
That, in turn, means that your forex forecasts should be that the currency will appreciate.
You should know that it is not all about high-interest rates. If the interest rates are low, investors will avoid putting their money into a country. They can also loan that country's currency at low-interest rates and use the money to fund other interests.
With relative economic strength, you do not get forex forecasts of the exchange rates, as you would with the PPP approach. With this approach, an investor gets a general sense of whether a currency will appreciate or depreciate.
When making forex prediction with this method, use it in tandem with other ways to produce a forex forecasts that is complete.
3. The Econometric Model of Forecasting Exchange Rates
This is another popular method you will encounter. Here, you will focus on the things that might affect the currency movements and the creation of a model that relates the variables to the exchange rates.
The factors you will use to make the forex forecasts are econometric, meaning that they are based on economic theory. Any variable can be added if you think it will improve you.
For example, in creating a model to do a forex forecasts of the USD/CAD, one might conclude that the most influential factors, in this case, are the interest rate differentials between U.S. and Canada, the difference in GDP rates and maybe income growth rate differences.
The forex predictions comes from:
USD/Cad(1 - Year)=z+a(INT)+b(GDP)+c(IGR)
where:z=Constant baseline exchange rate
a,b and c=Coefficients showing the relative weight of each factor
INT=Difference of interest rates between U.S. and Canada
GDP=Difference of their GDP growth rates
IGR=Difference of their income growth rates
It looks complicated, and that is because it is. However, there is nothing you cannot learn if you are determined.
Forex forecasts are not easy to do. That is why many of the companies and large investors simply choose to hedge their funds and currency risk. However, when they see value in forecasting, they will make a trade and try to use the factors they see to make a forex prediction that works in their favor.
The point is to do your forex forecasts carefully and accurately. That is how you can stay on top of everything you do. It is a process as well so, do not rush it.
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