How to Forecast Price Movement in the Forex Market

If a Forex trader could make a wish, it would be to always and without fail predict the price. It's essential information, but unfortunately always missing. It's the rule of the game: no one has a crystal ball. However, this doesn't mean that the price can't be determined with a reasonably low degree of approximation. This is neither obvious nor easy, but decades of literature and field experience have certainly served to create analysis methods that, for those who have the patience to learn them first and then put them into practice, offer a far from arbitrary foothold. Legitimizing this claim are elements that, falling into the categories of market movers and economic indicators, allow us to look into the future, or at least intuit the direction of an asset (in this case, currencies). First, however, we need to clear up a doubt: are prices actually predictable? The answer is less obvious than one might imagine. No one can have certainty, but according to widely accepted and practiced theories, the work of analysis is facilitated by the cyclical nature of the market. According to these theories, history always repeats itself, in one way or another. This, translated into everyday trading, means that prices always react the same way, given the same stimuli. Based on this truth, analysts and more enterprising traders have created statistical models, which in turn have transformed into so-called indicators. Having made this clarification, we can offer some advice for predicting price movement in the Forex market.

Use simple indicators

Over the past few years, many indicators have been created. Many of these, however, only complicate the trader's life. Not because they are useless or harmful, but because they are used at the wrong time or in the wrong way. More complicated indicators, in fact, serve to analyze the market under certain conditions, or to act as a countercheck, not for an immediate "prediction". As a general rule, we can recommend preferring "simple" indicators, which have moving averages, highs and lows, and patterns (i.e., the shapes that candles take on the candlestick chart) as ingredients.

Don't rely on just one indicator

One mistake that many novice traders make is trusting indicators too much, in fact, just one indicator. Maybe it has given positive results up to that point, maybe it's the only one that the beginner, who is by definition lacking in skills, masters with a certain dexterity. However, one indicator is not enough, even if it's the best in the world. The advice, before taking a signal as good, is to do tests and counter-tests, using various indicators. If they all confirm the signal, then it should be followed.

Study economic data

The real economy is the territory of very important market movers. Firstly, because some economic data generates an almost direct influence on the supply of currency and therefore on its price. Let's think about inflation, which has a reverberation on consumption but above all on monetary policy decisions. But the influence of the real economy is also given by its ability to inspire confidence or not in a currency. If, for example, the Euro-zone economy is doing well, it is likely that we will see an appreciation of the euro (among other things, this is exactly what is happening). There are many economic data to monitor. The advice is to follow only the important ones, which among other things are signaled (e.g., with three stars out of three) on dedicated platforms. The analysis of economic data (and not only) in a price prediction perspective is called "technical analysis".

Know the sentiment of analysts

Sentiment refers to the degree of confidence in a given object, in this case currencies. It is appropriate to monitor, if you have the right tools, the sentiment of the mass of retail traders (an important indicator is the dynamics of volumes). It is even more important, however, to monitor the sentiment of analysts, since, one hopes, they stand out for their competence and ability to evaluate. Investor sentiment can be gleaned by reading the papers "issued" by reference institutions. However, the factor of impartiality must be taken into consideration. In some cases, the papers may be biased by the institution's objectives, and therefore not completely impartial. On the other hand, papers play an important role from a marketing perspective.

Take advantage of order flow

In English, "order flow", which is also the term by which it is mostly known. This is a parameter that very few have available. Large banks and major financial institutions have it, for example. In simple terms, these entities have such a large customer base that it assumes statistical significance. So, when the order flow of customers undergoes changes, there is a high probability that this is also happening "outside". In simple terms, it is possible to predict the price of the Forex market by studying one's own backyard. If you come into possession of this type of information, use it: it is extremely rare.

Monitor the futures market

To be clear, the correlation has not been scientifically proven. Yet experience suggests that futures prices are able to anticipate, albeit with a high degree of approximation, prices in Forex. This happens for two reasons: one, because very simply futures influence investors' valuations; two, because they outline what prices will be in perspective, so they already incorporate an assessment by investors. There are various tools for analyzing futures as a whole. The most important is the "Commitment of Traders" report that the CFTC releases weekly.

Predict interest rates

Well, it's easier said than done. Predicting interest rates is almost as difficult as predicting the price. Yet, the "almost" offers a small hope. Also because, unlike investors, the actions of central banks follow a rational dynamic. In short, it is assumed, and in fact it is so, that a central bank does what is necessary and what is right. This, considering also that interest rate deliberations are preceded by more or less implicit declarations of intent, makes the manipulation of interest rates sufficiently readable.

Calculate the Purchasing Power Parity

In Italian, "Parità di potere di acquisto" and it is a tool as sui generis as it is interesting. This tool bases its claims of effectiveness on a dynamic, which is assumed to be true: when the same products have different costs in one country and another, currencies seek an equilibrium point so that products reach an identical cost level to purchasing power. Let's give an example: car A costs $50,000 in the United States and €45,000 in Europe. The exchange rate will move until it reaches 1.1, which is the ratio between the two prices (50,000/45,000). This parameter lends its flank to some criticalities. Firstly, it does not take into account transport costs and any duties. Secondly, it does not involve any assessment of the countless factors that, as we have seen in the previous paragraphs, influence currency prices.

Monitor the VIX index, or VIX Volatility Index

The VIX index estimates the implied volatility of options on the S&P 500, offering a forecast of the variability of the stock market in the next 30 days. In particular, if the VIX is low, volatility will be low; if the VIX is high or growing, volatility will be high. What do stocks have to do with Forex? A lot: the stock market acts as a generic but very strong market mover for currencies. Generally, it is Forex that follows the stock market and, except in rare cases, not vice versa.