FX Rates: What Are They?
It is literally impossible to accurately predict an FX rate. In order to attempt this feat you are required to conduct a detailed analysis of the different forex market trends and even then an accurate prediction is not guaranteed. There are two different types of trading analysis which can be used to determine these FX rates; these are technical and fundamental analysis. Some traders choose to combine the two for more successful trading.
Determining FX rates via technical analysis
The technical analysis method reviews historic data of the forex trading market and attempts to predict future events based on this past information. Many traders use this analytical technical as it has proven the most effective and stable of the two. The reasoning behind this is that the majority of the forex market is based on human behaviour and humans tend to react in a similar manner every time we are faced with the same situation making it safe to establish the presence of a pattern. Technical traders base their trading strategies and consequential trades on this pattern.
Determining FX rates via fundamental analysis
The fundamental analysis method is a more complex and in-depth technique that looks at the same information as the technical method yet utilises it in a different manner. Unlike technical analysis, fundamentals places more emphasis on the socio-economic policies, economic policies and political events of different countries and the impact these global events have on the forex market. It also examines the extent to which different governments are involved in the determination of their relevant FX rates, both past and present.
This fundamental analysis method can be utilised by both new and experienced traders although it is recommended for experienced traders over new. It has had greater success in predicting the markets movements as the trader will use the different global events to determine whether the market will have an upswing or downswing. For example, political unrest can cause the market to move in a downward direction. It must be noted that while an event within a particular country will affect the relevant currency on the market it will affect the global FX rates.
Combining fundamental and technical analysis to determine FX rates
While the option of using one method of analysis exclusively is available, it is not the most reliable choice. A trader can be successful by employing this technique; however using one method only often restricts the traders’ perspective and trading scope. Instead it is advised one combine both the fundamental and technical analysis types to attain a well-rounded and beneficial view of the forex market.
Although this is a beneficial stance there are various disadvantages to the merging as well. It is a massive and tiresome undertaking due to the vast amounts of information being provided from both technical and fundamental databases. The trader must be aware of the forex news releases at all times and how they may affect the FX rates. At the same time you must have insight into the patterns of the market and how the potential impact of global affairs can disrupt this pattern. This is incredibly challenging and many traders employ software to assist them.