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A Beginner's Guide to Predicting Currency Fluctuations

Foreign exchange trading
Foreign exchange trading

Foreign exchange trading – or forex trading – has become increasingly accessible thanks to the internet, yet a lot of people are still reticent to embark on their forex trading journey. Indeed, there is never a guarantee as with any trading that anything will work in your favour. Shock crashes and changes in currency have proven that there is still a degree of exciting change in global finance. But do we need a crystal ball in order to predict what might happen? Seasoned traders have developed some skills in order to anticipate what might happen to currency and what might cause a fluctuation – so here are some ways in which complete beginners can begin trading forex by learning to predict potential currency fluctuations.

Relative Economic Strength

One way in which experts anticipate currency fluctuations is through looking at the relative economic strength that a currency is connected to, which can help to forecast the direction of changes in exchange rates. Those with higher growth are more likely to foment investment and therefore continue the growth of the economy. This will lead to higher interest rates to keep inflation low, which will mean a currency is stronger against other currencies and better to be used to trade. Looking at the USD to ZAR currency exchange, we can see how the buy and sell price of US dollars and South African rand have increased and decreased through various changes to the country’s economic strength, for example after the financial crash of 2008. Looking at these past changes in the economy can help to see patterns of similar occurrences in the future.


Econometric Model of Forecasting

You can also investigate the fluctuations of currency based on an econometric model of forecasting. These can help track currency movements based on factors such as Gross Domestic Product (GDP) growth, interest rate differential between two currencies, and income growth rate. These factors can then be added into a model to predict how different variations on these factors will yield different results. Troubleshooting this and coming up with best- and worst-case scenarios enables beginners to understand what might be a good forex trade. Obviously, there are dozens of working models available that don’t require beginners to invent a new formula for measurement, and platforms exist that allow for both qualitative and quantitative factors to show which currency exchanges would be best.

Most currency fluctuations come from information that is readily available – it is just a matter of finding the models to understand how the information would affect forex trading. A country’s economy can be used to identify which currencies would make good trading pairs and which ones to avoid. You can also understand when the best time to make exchanges would be based on economic and political events in a certain country. Although some of the models may seem complicated, they are simply taking information and using it to determine the best currency trades to make. Once you are in the habit of looking analytically at these things, you will be a stronger trader.

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