Forex forecasting 0

Forex forecasting

Basic Forex forecast methods:

 Technical analysis and fundamental analysisThis article provides insight into the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental anal

ysis 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 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 ma

rkets 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 conditi

ons 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 do

wn trend, closing prices tend to be near to the

extreme low of the period range. Stochastic calculatio

ns produce two lines, %K and %D that are used to

indicate overbought/oversold areas of a chart. Dive

rgence 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 Fibonacciret racement number.

Gann numbers: 

W.D. Gann was a stock and a commodity trader work

ing 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 high

est high of the previous day. A down gap is formed when the highest price of the day is lower than the lo west 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 peak

s 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 techni

cal indicator used to determine whether or not

a currency pair is trending.

Unlike the fundamental analyst, the technical analys

t is not much concerned with any of the "bigger

picture" factors affecting the market, but concentr

ates 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.

 the source:classic easy forex

Forex forecasting