There are two different methods of forecasting. The first is called technical analysis. This methodology uses a narrow lens to forecast price movements because it focuses exclusively on statistical and mathematical data. Price is the most common type of information analyzed along with volume and open interest.
The basics of a technical analysis system include price charts, volume charts, and a number of other mathematical representations of market patterns and behaviors. They use mathematical extrapolations of various kinds of market data to evaluate the strength and sustainability of a particular trend. Technical analysts believe that by analyzing data, it is possible to predict future price movements of currencies.
The second type of methodology is called fundamental analysis. The fundamentalist is the reverse of the technician because they look at the big picture. The first part of that picture is the economic and political status of the country behind the currency.
Evaluating the country's economic stability means looking at the rate of inflation, unemployment, interest rates and tax policy. The fundamentalist also examines the current political situation, while taking note of impending changes like a new government or signs of political unrest.
The second part of the fundamentalist’s big picture is the attitudes of the market participants and the assessment of these attitudes. This assessment is sometimes considered too subjective to be relevant because many times a self-fulfilling prophecy occurs when market participants raise or lower the exchange rates because they believe some negative political or social event is about to happen.
Even though the approaches are different, both types of analysis complement each other. Traders who employ the principles of fundamental analysis still have to perform some technical evaluation of the market, and proponents of the technical approach must track changes like the rise and fall of interest rates and political unrest.
Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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