Every trader wants to know for sure what will happen next. Knowing where the price is headed essentially dictates your success, by simply having you bet on the right horse. However, as you probably already know, forecasting Forex is not as simple as it may seem. In today’s discussion we will explore the most common solutions to how to predict market direction in Forex.
Predicting Daily Market Direction
Forex forecasting can be compared with trying to predict the weather. There are two main factors that take 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 another — fundamental.
Technical analysis looks strictly at the numbers, such as: what was the price yesterday and how does it compare to today’s value? Also, is this change in price resembling the change that happened a month ago? Or a year ago? Based on the information collected during technical analysis traders make attempts to predict next day market direction as well as the ongoing day’s direction.
Fundamentalists, on the other hand, consider the factors slightly outside the actual market. Those can include political, social and economic events and reports that take place both locally and globally. When central banks, for instance, announce their rate decisions, a certain degree of activity generates in related currencies.
A third angle to mix in with both technical and fundamental approaches is sentiment analysis. It is based on the principle of traders being significant drivers behind the price movement. By considering the ratio of bulls versus bears, as well as measuring volume and volatility, we can get a good idea of how the market is currently progressing.
Using Volatility to Predict Market Direction
Volume and volatility are primary drivers of the market. Based on this statement, some might conclude that measuring the extents of volatility, for example, can help predict daily market direction, which is not exactly the case. High volume indicates that a lot of traders are currently paying attention to a specific pair. This results in increased volatility that gives price an opportunity to take massive swings in either direction.
The best way to describe the effect of volatility is by calling it unpredictable and fast-moving. So, logically speaking, using volatility to predict market direction simply isn’t an option. But it is also fair to mention that considering volatility as one of the factors in your analysis might come in handy. How exactly? Through applying the techniques of sentiment analysis, mentioned earlier.
One of the ways to have a clear vision of current volatility is with the help from especially designed indicators. Most of them are going to highlight bullish and bearish swings, while also taking into consideration the level of aggressiveness applied by all participating traders. For scalping and day trading volatility is vital, as it is the only way to achieve visible results. When the indicator shows higher numbers a scalper will know it is a great time to step in, because the price is very likely to grow or drop fast.
Now, as you might have figured, these are technical analysis tactics. So, let’s shift to a different approach and briefly discuss predicting market direction basis economic indicators and how to predict trends in Forex.
How to Predict Trends in Forex
The very first thing to learn about trends is that they are not the same as swings. Because there can be plenty of bullish swings in a downtrend and vice versa. Trend is basically a larger scale swing that ultimately expresses the overall mood of the market.
We’ve already mentioned that trends can be predicted from strictly technical data, such as comparing past reports or measuring volume and volatility to judge on a market's sentiment. Technical view comes in especially handy in predicting first hour market direction. However, apart from knowing how to predict the market open direction, there is always a necessity to see the big picture and be able to look slightly further forward.
For these scenarios traders utilize tools like Forex economic calendar. The calendar is an interactive collection of all scheduled events that traditionally have impact on the market. By using such a schedule, a trader can roughly predict daily market direction for a specific day and time. And in order to get a more in-depth understanding of the matter, professional traders combine the expectations with detailed analysis of connected factors.
This way, if the Federal Reserve System’s report is overlapping with an issue of a law that limits employment rights of foreign residents, the effect on the market might be different from when the report usually releases. To get a closer look of how fundamental analysis can be used during trading, check out our daily updates posted by experienced traders and analysts.
Predict Next Day Market Direction
From what we’ve talked about today, it’s easy to say that there is no one single way of how to predict the direction of the market. Every trader will have a slightly different approach than the other, whether it is using volatility to predict market direction or trend forecasting.
Most likely, the more you trade the higher is the chance you’ll come up with your own strategy to predict daily market direction. Just keep on exploring and keep your eyes open for fresh ideas and angles.