To know further movement of a currency price is very important and it is a right wish. All market participants want to obtain methods of forecasting. Forecast of currency movements is a very important thing in Forex trading.
There are several methods allowing traders to forecast further movements of trading instrument price. Moreover, it is very hard to choose the most effective methods, of course, forecasting the trend of a currency rate is a challenging task. The most popular methods of forecasting currency trends.
1. The theory of purchasing power parity
The method of purchasing power parity is very popular and based on the of one price and it means that goods should have one price in different countries. Very interesting adaptation of the purchasing power parity method is showed in the example of the Big Mac index that was published by The Economist. In this case, we can see that the comparison of the Big Mac prices serves as the basis for the because Mac is an identical project in all countries.
2. Relative economic strength approach
This method is based on GDP growth in different countries that to the forecast of exchange rate movements. This approach is not only based on the relative economic strength between countries. It also allows traders to be on top of information on all investment flows. When the trader used the relative economic strength approach he should combine this method with other forecasting methods if he needs more details.
3. Time series model
Time series model is a technical method and has no deal with economic theory. In the time series, the most popular approach is autoregressive moving average. And with the help of this method, the trader can forecast future dynamic of a currency instrument.