Predicting the Foreign Exchange Rates

Predicting the Foreign Exchange Rates

Success on the forex market is closely linked to a trader’s ability to determine when the best foreign exchange rates for their trade will come.  Traders use a number of methods to try and predict what the market will do.  Of course, there is no way that you can predict what the market will do with 100% accuracy.  However, using these methods does help you to predict what will happen to a certain extent, at a rate that is high enough to make you profitable.

Taking Spreads Into Account

Before you look into predicting the foreign exchange rates you have to consider the role that brokers’ spreads play.  When you open a position with a broker you have to pay a spread.  Instead of charging a commission on the trade forex brokers’ use spreads to make their money.  The spread will affect the profit you can make on a trade.  If you are expecting the exchange rate to rise by 5 pips, but the spread you get is 3 pips then you are only making a 2 pip profit.  You have to consider this when you open trades and when you are looking at what the exchange rate is going to do.

Foreign Exchange Rates and the News

The news is one way that traders try to predict what the rates will be.  This is generally used by fundamental and long-term traders.  There are certain news items that affect the currency of a country and you should know what these are.  If you do not know what these are then you can use a forex calendar to help.

When these news items are released investors and forex traders begin to trade based on the information in the release.  If the news from the release is positive then the rates will rise and traders should look at trading on this trend.  However, if the news is bad the market will trend in a different direction and traders should trade on this.  Of course, there are times when the market does not trend after a news release.  At these times trend traders should not trade and range traders can consider trading.

Technical Trend Analysis

For 20% of the time the forex market will be trending.  This means that there will be a strong movement in a single direction.  It is important that you are able predict when this is going to and analyse the strength of the trend.  You need to know the strength of the trend in order to make the most out of the trades you make.

There are a number of different ways that traders are able to identify when a trend is going to happen and what the strength is.  To determine trend strength many traders use a MACD histogram.  However, with the predicting of a trend you can use a range of technical tools.  Some of the most common tools are Bollinger Bands and moving averages.  It is important that you know exactly what to look for in order to make the most out of the trend.

There Will Be Losses

As there is no way to predict what will happen with 100% accuracy you need to be aware that some trade will lose you money.  This is something that all traders will face.  You have to learn trading techniques that help you accept these losses otherwise you may open emotional revenge trades.

 

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