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It is incredible to see how many traders out there start calling different future price levels and saying that a certain currency pair will fall or rise in the long term and how another will not, etc. One of the first things that new forex traders are tempted to do is to issue forecasts of future price movements of currencies and act accordingly. On todays post I want to write about this practice and how the forecasting of currency pairs should be avoided if you wish to become successful in currency trading. Particularly I want to pinpoint the dangers and flaws of fundamental forecasting and how trading based entirely on price action - with the application of some sound trading principles - is in my mind the best way to achieve success either in manual trading or in the design of automated trading systems.
First of all, it is good to know what I refer to as forecasting. When a person says "The EUR/USD will be 1.60 in 2 years", that is what I call forecasting, an attempt to predict the future based on some evidence that holds no predictive power over such a wide range of possible outcomes. Predicting economic cycles, wide movements, bottoms, tops and similar unpredictable market outcomes are some of the fundamental reasons why new traders fail.
It is easy to understand why so many people fall victim to forecasting. We like to be right and forecasting a given price level that in the long term becomes true is very satisfying. For example, if you said in December 2009 that the EUR/USD would reach 1.3 next year, you would have made a very accurate forecast of what would have happened in the future. However there was no substantial evidence to guide you towards this conclusion and hitting the nail on the head with your prediction might have been a simple lucky guess. Of course, I can say that next year the EUR/USD will reach 1 or 1.5 and probably I would be right about one those forecasts due to the yearly volatility of this forex currency pair.
However what we have to understand here is that we cannot come up with conclusions outside of what is being showed by a certain currency pairs price action. I saw many people talking about the EUR/USD reaching a bottom around 1.32-33 when in fact there was no evidence to believe this to be true. Of course, in the end the people who make money are the people who play the market by two extremely simple principles. Take into account support and resistance levels and follow the trend.
Why would you be willing to go against a trend that is so crystal clear on the charts ? There is a reason why trends develop and taking trades against long term trends is suicidal most of the time. Reversals are quite rare and they take long periods of time to develop and for this reason they are not a good strategy to trade, it is much better to wait until a reversal happens and a new trend develops than attempting to enter the "beginning" of a new trend by guessing a reversal is in place. When you watch support and resistance levels not only are you able to accurately gauge the probabilities of price movements but you are also able to get into very good spots for long term trend following.
What you need to understand here as a trader is that you should read the information the market tells you and make an educated guess regarding price movement based on the simple assumption that trends will most of the time continue and support and resistance levels will shape price action. It is a matter of interpreting what the market is telling you and forming a high probability outcome based on these two simple market principles.
So in the future you should not try to forecast the price level of a currency in a few years or attempt to "call" the bottom or top of the current trend. You should focus on following price action relative to support and resistance levels and following trends, entering them on favorable positions based on your first analysis. Trading what you see on the charts instead of what you hear on the news or what you think will happen in the future is vital in order for you to achieve long term success in forex trading. Of course, the above technique is what has worked for me but other ways of analyzing price action and coming up with good probability reading may obviously be possible. Just remember : do not attempt to forecast, just follow your charts.
If you would like to learn how you can develop your own long term profitable strategies using forex automated trading please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
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