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How to predict exchange rate fluctuations

In order to correctly forecast future fluctuations in currency exchange rates, it is critical to keep abreast of political events, to monitor economic indicators, and to keep a ‘track record’ of previous changes in currency exchange rates. You will be able to significantly reduce your losses and increase your gains if you carefully analyze the current status of your Forex account and prepare detailed action plans to follow if exchange rates fluctuate dramatically.


FUNDAMENTAL ANALYSIS

It is postulated that price fluctuations in the securities, commodity, and currency markets are impossible to predict. Not surprisingly, very few people adhere to this view. The average member of society who watches the news on TV could not but notice that, over the past several years, starting from 2001, the state of the US economy has deteriorated significantly. Since then, the exchange rate of the euro against the US dollar has increased from approximately 85 cents per euro to 1 dollar 37 cents per euro (as of end 2004). Meanwhile, market pundits and active market participants constantly monitor a far greater number of economic indicators, which are calculated to gauge the health of the world’s leading economies. This means they are better informed about current events, which helps them respond more quickly and accurately to fluctuations in exchange rates and, therefore, earn hefty gains. As a rule, forecasts, based on the careful analysis of economic parameters, underlying indicators, and news flows, lay the groundwork for the so-called fundamental analysis.

Fundamental analysis is a valuation method used to forecast future fluctuations of exchange rates, estimated on the basis of economic parameters, underlying indicators, and news flows.


TECHNICAL ANALYSIS

Additionally, certain patterns in price movements have been detected through trial-and-error and consistent analysis of price charts. Some of these patterns were discovered and described hundreds of years ago. Moreover, today theoretical foundations have been identified for these patterns. Forecasts, issued on the basis of price charts, analyzed with the help of technical indicators, are collectively called technical analysis.

Technical analysis is a valuation method, based on the analysis of price charts with the use of technical indicators and linear instruments.


DECISION-MAKING

After making his/her forecasts, a market participant needs to assess the current status of his/her Forex account, a possible number of open positions, as well as to develop an action plan if the market reverses against him/her. Then he/she opens all or a part of the trading positions, continuously monitors the current status of his/her account, and makes a decision either to close positions or to open additional positions. Strictly speaking, this process called Money Management is not a forecasting technique, but it does help ramp up gains and reduce possible losses.