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How to Analyze Forex Price Trend

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The two pain points in forex trading are to distinguish from the long, short and consolidating market and to overcome the human weakness to operate against the market. To this end, it is necessary to continuously accumulate experience and understanding of the market, as well as to study and judge the fundamental and techniques. For these, there are not shortcuts.

 

Trends are your friends

 

Under the current floating rate system, there are only three types of forex trend, namely rising, falling and consolidating.


In the forex market, the consolidation market accounts for about 70% -80% of all the trading days in a year, and the remaining 20% - 30% are long or short trends. In the consolidation market, investors must first distinguish the consolidation range, then sell at the upper range of the range, and buy in at the lower range, that is the so-called buy low and sell high, in order to obtain profit with a contained risk. If the investor can rationally implement the stop-loss strategy, they may even consider increasing the investment amount to obtain greater profits.


But for most people in the market, they still want to grasp the left 20% -30% of the market and follow the trend. The main reason is that following the trend brings back considerate profit, and the number of stop-outs is comparatively low, so the additional cost is also greatly reduced. What's more, to follow the trend you just need to practice rather than create. All you need to do is to buy and sell in accordance with existing market trends in a known-to-all, easy-to-practice way so market people believe that "trends are your friends."


In real practice, however, there are two problems: one is how to distinguish the long market, short market and market consolidation; another is to overcome the human weakness. Overcoming human weaknesses can usually be achieved by accumulating experience and increasing awareness after suffering loss. As for how to distinguish market trends, it can be judged from the fundamentals and techniques.


The basic premise of an investor's operation in the forexmarket, whether it is a buyer or a seller, is to predict the future price trend, then determine the investment strategy and operation direction.

 

How to Analyze Forex Price Trend


Fundamental analysis based on data


Fundamental analysts believe that the strength of the currency reflects a country's economic situation. Although its strength may be temporarily disturbed by other non-economic factors to result in an even opposite trend to the economic constitution, but in the long run, the price will eventually return to a point in accordance with the economic condition. As for how the economic situation of a country should be measured, a comparative comparison must be adopted. For example, the economic growth rate of the United States in 1996 was estimated to reach 3%. In the eyes of fundamental analysts, this data cannot reflect the trend of dollar. It must be compared with the previous-year economic growth rate and with the economic growth rates of other powers such as Germany and Japan. If the economic growth rate of the United States in the previous year was 2%, and the economic growth rates of Germany and Japan in 1996 were around 1.5%, then a 3% data would make fundamental analysts think that the US economy was gradually increasing better than that of Germany and Japan. The US dollar should be relatively stronger against the mark or the yen to reflect its economic strength. Fundamental analysts will then use this as an indicator operation to buy US dollars and sell Japanese yen and mark.


Data that reflect the economic situation, or the so-called economic indicators, cover a wide range including the economic growth rate, trade deficit, budget deficit, money supply, Consumer Price Index (retail price index), Producer Price Index (sale price index), unemployment rate, housing starts, leading indicators, etc. As the focus of fundamental analysts, these data are regularly released by government departments. Investors of this type will collect and analyze these data, compare and use it as the basis for judging the future trends.


Despite the accuracy of predicting the future trend of the currency market, fundamental analysis has indeed become an important reference for market participants to make investment decisions for a long time.

  

Fundamental analysis fits more for the mid-to-long-term trend

 

It is relatively appropriate to use fundamental analysis to predict the mid-to-long-term trend of the currency within the next 6 months, 1 year, or 2 years. But ever since the gold standard system was abolished and the floating exchange rate system became the new global standard, factors other than fundamentals have become more influential to the currency prices.


Today's forex market has gone through a long time after the era of fixed exchange rate. Therefore, all kinds of information, from political and economic news to rumors and hearsays can shake the market. It is obviously too simple to infer the price that currency should have based on purchasing power parity alone. Investors can only use the currency price derived from this theory as a reference.

 




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