FOREX, or foreign exchange, traders seek to identify trends in the relative exchange rates of currency pairs. They seek to identify uptrends, downtrends and sideways trends or range bound trends. Traders predict and confirm trends through fundamental analysis and technical analysis.
- Use fundamental analysis to predict exchange rate trends based on economic and political factors
Foreign exchange traders carefully study a country's economic indicators, such as its interest rates and financial growth, as well as its political situation to predict long- and short-term trends in the value of its currency relative to other currencies. This method of prediction is called fundamental analysis. To determine day trends, a trader will rely on daily news reports. However, many macroeconomic trends underlying exchange rates evolve over long periods and require long-term analysis.
- Employ technical analysis to predict exchange rate trends based on past events
Foreign exchange traders also use technical analysis, which uses models that predict future exchange movements from historical trends. One of the tools available to traders is an analysis of support and resistance. If the exchange rate shows a trend to moving above a period of resistance, where price was capped by supply, there is a sign of an uptrend. Conversely, if a currency pair has been through a period of support, in which demand has lifted prices, a downward trend is likely.
- Acquire a cautious, disciplined approach to determining day trends
When attempting to determine day trends in the foreign exchange market, a trader should not be too quick to establish a position immediately after a major event causes a change in the market. It is preferable to wait until the initial period of volatility subsides and a definite trend emerges.