Forex is considered as a lucrative market that offers great opportunities to earn a profit. With a significant amount of changes in strategies, one can perform trading with perfection. Even if the price sets to reverse, you can beat the economic challenges to make your trade profitable.
Investors and analysts always want to know the future exchange rates and trading prospects. With different forex forecasting methods, it can be easily found out. Traders can predict the future prospects of trading with available forecasting methods.
Exchange rate forecast:
Exchange rate forecasting is based on two separate approaches. Each of them is vital and should be utilised tactfully. It includes:
- Fundamental Approach
- Technical Approach
The fundamental approach is the technique that will utilise data specific to country’s GDP, productivity, inflation rates and unemployment rate. If the technical approach is considered, then it highlights prediction using a chart pattern on the computer screen.
Forex forecast methods:
In the most popular list of forex forecasting methods, there are only four that make their place.
- PPP model (Purchasing Power Parity):
PPP forecasting approach is recognised as ‘Law of One Price’. This states those same goods in two or more different countries should have the same price. The price of these goods will include exchange rate while it excludes shipping and transaction costs.
- Relative Economic Strength:
This method is based on the direction of exchange rates in terms of the strength of economics of the different country. With the relative economic strength method, it becomes easy to attract investors. Here, the demand for currency will increase along with its interest rates.
In fact, PPP approach helps in determining a forecast, but relative economic strength approach evaluates the appreciation or depreciation of any currency.
- Time Series:
This method is likely to deal with the time series approach. This is the reason that it is also termed as ARMA process (Autoregressive Moving Average). It is based on a technical approach.
A time series of data is needed to find the factors that are important to make a change in the forex market. It is thus, important to create a workable model using series of information that will highlight the future prospects of currency exchange rate.
In Econometric method, it is essential to forecast exchange rate using certain relevant factors. These factors will be relevant to one country’s currency that includes GDP growth rate differences, Interest rate differential (INT) and income growth rate differences (IGR) based on economic theory.
For example, the econometric method for USD/ CAD exchange rate will be shown as:
USD/ CAD (1 year) = z + a (INT) + b (GDP) + c (IGR)
Things to remember:
Forecasting forex market is not an easy task. It is thus, important to find factors that affect country’s economic growth. This helps in using forex forecast methods wisely without any lose points. Exchange rates fluctuation is a part of the forex market. It is essential to exposure to different techniques and checks how to make important trades supplement the income.