Forex Trading: Can the Market Be Predicted?

The concept of forecasting, or better yet "prediction", can be considered the philosopher's stone of Forex Trading in particular and of all investment activities in general. Being able to predict the market and intuit prices in the immediate future would represent the ultimate weapon of every trader. At a superficial analysis, and considering that some traders are effectively able to enrich themselves in an almost inexorable way, one could say that some form of prediction is possible. Difficult to put into practice, perhaps, but still possible. The truth, unfortunately, is more complicated than that. Moreover, it smiles upon traders less than one might think (or hope). In this article, we will talk in depth about the relationship between Forex Trading and the concept of forecasting/prediction, clearing the field of false prejudices and offering some advice where it is really possible to give them.

The question of prediction

Let's start directly with the answer to the initial question. Can the market be predicted? Well, if predicting the market means acquiring realistic and truthful information about future prices, the answer is negative. There is no way to predict prices with this level of precision. This is a point on which we need to be clear, also because it is on the false assumption of predictions that new aspiring traders come forward every day, remaining deeply burned and suffering dramatic consequences. In simple terms, the risk is to distort or compromise the effectiveness of one's trading activity and thus lose one's money. Predicting with absolute precision the market, be it currency, stock, bond, etc., is impossible for a whole series of reasons. Below we list the most important and obstructive ones. The players are numerous. The market, any market, is populated by an incredibly high number of investors. This plethora, in addition to its numerousness, is also distinguished by a marked heterogeneity. Investors can be small and large, retail or institutional, with a lot of capital available or with little capital available. This heterogeneity also reverberates on the purposes, which are the most diverse. For example, institutional investors are interested in price equilibrium, investors representing the interests of multinationals aim at protection from exchange rate risk, retail investors simply aim at profit. These characteristics of numerousness and heterogeneity give the currency market (and not only) a marked unpredictability. There are many factors that influence the market. In theory, as well as in an ideal world, prices are determined only by the quantity, volume and character of trades. The real world, however, is infinitely more complex than that. The truth is that there are numerous factors at play, some of which operate in a relationship of independence with each other. Others, on the other hand, do not even directly concern the market. For example, politics. It significantly influences the markets, as do geopolitics and events that develop in the international context. All this confers, again, unpredictability to the market. Irrationality or emotionality is a fundamental component. The collective imagination sees the trader as a cold, calculating individual, able to always operate with maximum efficiency. And yet he is a man like everyone else, who can fall victim to emotional pressure. This dynamic, by the way, also involves groups, therefore also institutional investors, albeit with different characteristics. In any case, it is an incontrovertible truth that irrationality represents an uninvited guest in trading. After all, expressions like "panic on the stock market" are well known even to the uninitiated and also concern, in truth, the currency market.

What can be predicted in Forex Trading

So, should the argument of forecasting be set aside? Actually, no. At least, not completely. If prices remain a taboo, other elements are not at all. Provided you abandon the concept of "precision", as well as that of infallibility. If the presence of even wide margins of error is set as a condition, the question of forecasting can have its own outlet, its own role in trading activity. Even if, on closer inspection, in this case one could not speak of forecasting, but rather of statistical calculation. But anyway, you can always tackle the topic regardless of its many nuances. So, what can be predicted with wide margins of error? Actually, quite a few things. Moreover, we are not in the field of power, but of duty. Putting into practice activities that allow a forecast of the market (from this point of view and only from this one) is the conditio sine qua non for a practice of Forex Trading that is truly effective and a harbinger of earnings. Among other things, certainly with some points of divergence, all this concerns speculative investment in general, therefore the stock, bond, commodity markets, etc. The direction of the trend. Yes, the direction of the trend can be predicted. Obviously, with all the ifs and buts of the case. That is, with a very wide margin of error, as befits a statistical analysis rather than a "crystal ball" prediction. Among other things, knowing the direction of the trend is very useful because it represents information that can guide trading action in a specific and effective way. Obviously, it is not simple. Firstly, due to the often chaotic and heterogeneous nature of the market. Secondly, because it is necessary to implement complex practices of a statistical nature. The levels at which prices bounce or gain strength. These levels, as all traders know, are called "pivot points". More prosaically, support and resistance levels. There are in fact price thresholds that act as if they were "triggers" for investors and for the market in general, both for technical reasons and for emotional and psychological reasons. In general, when a price exceeds a pivot point, a strengthening of the trend is expected. When it "bounces", a trend reversal is expected. Again, identifying supports and resistances is complicated (also because there is more than one). Maximum prices. Yes, the question of prices is not entirely unrelated to the concept of forecasting. Obviously, we are talking about maximum prices, with a huge margin of error. The issue could even be irrelevant, and it is certainly less important than the one relating to the direction of the trend in the medium and short term and the acquisition of pivot points. Also because the data, from both a strategic and an operational point of view, is not so useful and has a very limited use.

How to "predict" the market

How to predict all these elements? Before answering this question it is necessary to clarify a point. It is very complicated. This prediction, which, we repeat, has a purely statistical nature, must be gained by dint of analysis, interpretations, etc. Skills and a certain experience are necessary. In any case, the instrument of choice is technical analysis. It consists of an in-depth study of charts in order to understand price movements. It is based on some statistical models, which should suggest a certain periodicity of price dynamics. Those who practice technical analysis in a complete way do so by means of some resources, called indicators and oscillators, which process data from the chart and return, after interpretation, specific signals. Technical analysis is relatively simple to practice at a basic level but incredibly complicated at an advanced level. Another tool, or better said practice, that allows an understanding of the market and determines the possibility of understanding future movements consists of fundamental analysis. Here the object of study is not the market but what, importantly, lies outside the market. The object of study is primarily the economic environment, but also the political and geopolitical one. The reason lies in the ability of elements present in these contexts to impact prices. The performance of the economy represents an important factor, as do political events (which affect economic performance and investment regulations). Fundamental analysis is practiced by studying market movers, i.e., impactful events, predicting their outcome and understanding the influence they will have on prices. Critical thinking, interpretation skills, and experience are necessary. Although the presence of calculations and numbers is more rarefied in this case, fundamental analysis is more complex than technical analysis. In short, practicing good fundamental analysis is quite difficult, precisely because the contribution of mathematics is practically zero and that of statistics is very reduced. Finally, sentiment analysis should be mentioned. The concept of sentiment is very interesting, and includes elements such as the level of confidence of investors and key players, shared opinions, the dynamics of psychological resilience, especially in times of stress. Studying sentiment means protecting oneself from waves of irrationality and panic and being able to understand, roughly, when the conditions exist for the occurrence of periods of volatility driven mainly by the emotional component. Rather than complex, sentiment analysis is laborious, precisely because emotional issues must be read by studying communications between investors and these take place in a plurality of contexts and platforms. Technical, fundamental, and sentiment analysis. Which is the most important? Which is the most indispensable? Asking these questions is wrong. Very simply, all three should be put into practice and, indeed, should be integrated with each other.