How To Predict the Forex Market trends

The Forces of Supply and Demand, Market Drivers

A market, in its traditional sense, is composed of a seller, a buyer, and a commodity, and the interaction between them determines the price. This is based on the driving forces of the market, commonly known as supply and demand.

• Supply: The quantity of a commodity or service available for actual trade.
• Demand: The desire for the commodity available in the market.

The relationship between supply and demand determines the prices. When the supply of a commodity increases, the price typically decreases, indicating a lower demand. Conversely, an increase in demand for a commodity without a corresponding increase in supply will drive the price up.

This means that demand forces are driven by buyers, pushing prices upwards, while supply forces, driven by sellers, push prices down. The ongoing interaction between buyers and sellers in the market creates price movements. By understanding which force—demand or supply—dominates the market, we can predict future price directions. This is where analysis comes into play.

In the foreign exchange market, most currencies are traded on the basis of floating exchange rates. This means that their prices fluctuate based on supply and demand in the forex market. An increase in demand for a currency or a decrease in its supply will raise its exchange rate, and vice versa. The forces of supply and demand are influenced by factors like monetary policy, inflation rates, political and economic conditions.

The Concept of Price Action Analysis

To predict market movements, you must study both current and historical data, whether economic, financial, or price-related, to forecast the market's direction in the coming periods. In financial markets in general, and forex markets specifically, there are two main schools of thought for analyzing market trends:

• Fundamental analysis
• Technical analysis

Let's briefly explore each concept and how they help in predicting price trends.

Fundamental Analysis

Also known as economic analysis, it involves studying the economic and political variables that affect currency movements. It assumes that the demand for a currency is strongly influenced by the economic strength of the country. A stronger economy leads to higher demand for the country's currency, driving its value up.

On the contrary, negative economic data, signs of weak economic activity, recessions, or political tensions tend to weaken a currency. When negative news impacts the economy or increases political instability, demand decreases, and the currency's price falls.

Important note: Due to the pair system in forex trading (where you are buying one currency while selling another), the strength or weakness of a currency is relative. For example, you buy the stronger currency against the weaker one, or you sell the weaker currency against the stronger one.

The following educational video summarizes the concept of fundamental analysis and the differences between its schools, along with how to use them for predicting market movements before starting your trades.

Example:
On June 23, 2016, the British people voted in a referendum on the UK’s withdrawal from the European Union, known as "Brexit". Many economists predicted a negative impact on the UK economy due to this decision, along with political tensions between the UK and its European neighbors, leading to a decrease in demand for the British pound. The Pound depreciated against the US dollar, creating a short-selling opportunity.

Economic Calendar:
An essential tool for fundamental analysis in forex is the economic calendar, which lists key dates for economic indicators and events that affect currency movements. It helps traders understand the impacts of economic releases on supply and demand forces in the forex market.

For further clarification on how the economic calendar can help you analyze forex, watch the video below:

Technical Analysis

Technical analysis is the study of price movement on charts to predict future price directions. It is based on the belief that history repeats itself and that all events affecting the market are reflected in price movements. Thus, studying price movements on a chart is sufficient to predict future prices without needing to understand the causes behind those movements.

Charts are the main tool for technical analysts as they show the relationship between price data and its changes over time. There are many techniques and schools within technical analysis to read charts effectively. In the following articles, we will explore these techniques and how to read charts to help predict price movements and generate trading opportunities in the forex market.

The video below briefly explains the different types of charts and how to use them: