Every trader wants to know for sure what will happen next. Knowing where the price is headed essentially dictates your success, simply having to bet on the right horse. However, as you probably already know, forecasting Forex is not as simple as it seems. In today’s discussion we will explore the most common solutions to predict the direction of the market in Forex.
Predict the Daily direction of the market
The Forex Forecast can be compared to trying to predict the weather. There are two main factors that have an effect: past data and current points of influence. These two translate into the main approaches to market analysis, one of which is called technical, and the other — fundamental.
The technical analysis strictly analyzes the numbers, such as: what was yesterday’s price and how does it compare with today’s value? Also, does this change in price resemble the change that happened a month ago? Or a year ago? Based on the information collected during the technical analysis, traders try to predict the direction of the market the next day, as well as the direction of the current day.
Fundamentalists, on the other hand, consider factors slightly outside the real market. These may include political, social, and economic events and reports that take place both locally and globally. When central banks, for example, announce their rate decisions, a certain degree of activity is generated in related currencies.
A third angle to blend with technical and fundamental approaches is sentiment analysis. It is based on the principle that traders are important drivers behind the movement of prices. By considering the relationship between bulls and bears, as well as measuring volume and volatility, we can get a good idea of how the market is progressing today.
Using volatility to predict the direction of the market
Volume and volatility are the main drivers of the market. Based on this statement, Some might conclude that measuring the extent of volatility, for example, can help predict the Daily direction of the market, which is not exactly the case. The high volume indicates that many operators are currently paying attention to a specific pair. This results in increased volatility that gives the price the opportunity to take massive changes in any direction.
The best way to describe the effect of volatility is to call it unpredictable and fast-moving. So, logically speaking, using volatility to predict the direction of the market is simply not an option. But it’s also fair to mention that considering volatility as one of the factors in your analysis might be helpful. How exactly? Through the application of sentiment analysis techniques, mentioned above.
One way to get a clear view of current volatility is with the help of specially designed indicators. Most of them will highlight bullish and bearish swings, while also taking into account the level of aggressiveness applied by all participating operators. For scalping and volatility of daily operations is vital, as it is the only way to achieve visible results. When the indicator shows higher numbers, a reseller will know that it is a good time to intervene, because it is very likely that the price will rise or fall quickly.
Now, as you may have guessed, these are technical analysis tactics. Therefore, let’s switch to a different approach and briefly discuss the prediction of economic indicators of the market direction and how to predict trends in Forex.
How to predict trends in Forex
The first thing you should learn about trends is that they are not the same as swings. Because there can be many bullish changes in a downtrend and vice versa. The trend is basically a larger-scale swing that ultimately expresses the overall mood of the market.
We have already mentioned that trends can be predicted from strictly technical data, such as comparing previous reports or measuring volume and volatility to judge a market sentiment. The technical vision is especially useful for predicting the market direction of the first hour. However, apart from knowing how to predict the open direction of the market, there is always a need to see the big picture and be able to look a little further forward.
For these scenarios, traders use tools such as the Forex economic calendar. The calendar is an interactive collection of all scheduled events that traditionally have an impact on the market. By using such a schedule, a trader can roughly predict the daily market direction for a specific day and time. And to gain a deeper understanding of the issue, professional operators combine expectations with a detailed analysis of the connected factors.
Thus, if the Federal Reserve System Report overlaps with a subject of a law that limits the labor rights of foreign residents, the effect on the market could be different from when the report is generally published. For a closer look at how fundamental analysis can be used during trading, check out our daily updates published by experienced traders and analysts.
Predict the direction of the market the next day
From what we talked about today, it is easy to say that there is not a single way to predict the direction of the market. Each trader will have a slightly different approach to the other, whether it is using volatility to predict the direction of the market or forecasting trends.
Most likely, the more you trade, the greater the chance that you will find your own strategy to predict the Daily direction of the market. Just keep exploring and keep your eyes open for new ideas and angles.