3 Most Applied Techniques That Help Forecasting Currency Exchange Rates |
Posted: August 24, 2019 |
As a forex trader, it is essential that you know how to forecast the currency rates. This will help you make the right decisions that will prevent you from incurring losses. In this article, we shall discuss with you the 3 most used techniques by traders to predict the exchange rates of the currencies. 1. PPP or the Purchasing Power Parity In most of the textbooks of economics, you will be able to find PPP or purchasing power parity. It is one of the well-known methods for predicting exchange rates. The PPP's predictions are based on a theoretical law. This law states that the prices of identical commodities should be the same in different countries. In simple terms, it would mean that the price of a pen (excluding shipping and transaction cost) in the USA should be the same as the price in Canada. This prevents anyone from purchasing a commodity from one country at a cheap price and then sells it at a higher price in another country. As per the prediction of the PPP technique, the rate of exchange has to change because of the change in price caused due to inflation. For example, the price of the pen in the USA will increase by 4% and whereas for Canada it will increase by 2%. The difference between the increases in the price of the pen in 2 countries is 2 %. As per the PPP if the price of the pen has to be the same in both the countries, then the rate of exchange of the dollar will be depreciating by 2%. Since the price of the pen was to increase by 2% more in the USA the balance will be created automatically when the rate of exchange will decrease by 2%. 2. Relative Economic Strength As per the concept of the relative economic strength, the increase or decrease in the exchange rate of a currency is determined by the economic power and stability of the country. As per this approach, if the country's economic environment is strong and has a high potential for growth, then more will be the number of interested foreign investors. To be able to invest as a foreign investor in a country, they will have to buy the currency assets of that particular country which will lead to the appreciation of the currency of that country. It is not just the relative economic strength that can improve the value of a currency but there are also various other factors. For instance, the high rates of interest also are responsible for foreign investors to show interest in a particular country. With the relative economic strength approach, a trader will not be able to rate of exchange but will be able to have a prediction of the currency will appreciate or depreciate. To get the best results from relative economic strength approach a trader will also have to use some other methods of forecasting. 3. The Econometric Models Many traders forecast the exchange rate of a currency with the help of their collection of factors which they believe will be affecting the fluctuations in the rate of a currency. With these collected factors and information they create a model (econometric models) which is used to forecast the changes in the rate of a currency. In these models, the theories used are generally related to economics but in case there is another factor and is believed to play a role in the increase or decrease of the rate of exchange of a currency, then this factor is also added to the model. As you start with forex trading you will eventually get a hang of these three techniques. Practicing these techniques simultaneously will help you have a stronger prediction and thus a stronger chance of converting a win. If you want to be good at forex trading like the elite traders, it is advised that you should start taking lessons from a genuine mentor. This will help you understand the techniques easily and use them together. Sometimes there are some predictions which seem to be working in your favor but can be the other way round. Having a mentor will make you aware of these rare exceptions too. You can look for a genuine mentor for a forex trading course on the internet. To find the best mentor for yourself click here.
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