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Predicting the Movements of the Forex Rates

The law of supply and demand dictates the movement of the foreign exchange market. The law of supply and demand is very simple in that where there is a need for a specific currency, the price for that currency will rise and when an excessive supply of the currency happens, the price will consequently fall. Yet despite of this simple rule or principle still predicting the movements of the Forex rates is not very easy at all.

In the recent times, there are actually two major methods employed to predict the movement of the Forex rates in the market- fundamental analysis and technical analysis. Fundamental analysis dominated the foreign exchange market up to the mid eighties while the technical analysis became more popular in the recent years with the onset of newer technology that provides the required tools for analysis.

The Fundamental Analysis

The traders who use the fundamental analysis in predicting the movements focus on the political, economic as well as the social factors which can direct the supply and demand. The traders analyze the interest rates, unemployment, inflation and the growth of the economy. They make a sound assessment on the present condition of the currency afterwards then predict the currency's movements in the future.

The trader needs to be constantly informed of the events to be able to analyze the data. There is also the debate on what date should and should not be included. The biggest task is giving the weight for each data on the basis of various factors. The major basis to fundamental analysis comes from the balance of payments of the country. This means the flow of the money of the country, how much money goes in and out. A static rate would be produced when there is a balance of zero payments. The currency will likewise move if there is a deficit or surplus. A deficit balance of payments means that money is leaving the country in a fast pace. Normally this would result in the devaluation of the currency.

Technical Analysis

A technical analyst makes use of the historical price data to study the movements of the price and to predict the movements of the future prices. There are actually two principles behind technical analysis. The first principle says history repeats itself and this means that the rates will move today according to the ways and patterns that have already been established by time. The second principle is that it is not important to study the other current information about the market to predict the movements of the market because this is already indicated in the prices of the currency.