Machine learning is becoming extremely important for investors. The forex sector is no exception.
Fabrice Daniel discussed this issue in an article about the role of financial time series for forex trading. Daniel pointed out that this is an important application for predictive analytics. It is difficult to implement in practice, but the merits are obvious if you understand the role it can play.
Traders that use predictive analytics tools strategically can have a huge edge against the competition. They should leverage machine learning technology to their full advantage.
We all know that the forex market is one of the largest and most volatile in the world, and one that’s defined by inflated leverage and increased liquidity (particularly amongst dominant major pairings). There are so many different factors that come into play with forex trading, which makes it very difficult to make sound, analytical decisions.
This is where predictive analytics technology can be very helpful. Machine learning applications in forex are still in their infancy and there are some limits due to the extraordinary number of fields. This has led many academics and other sketpics such as John DeCleene to cast a damper on the idea. However, the potential for using predictive analytics to make accurate forecasts can be very promising after these issues are sorted out.
It’s also a deceptively complex space, with terms like ‘forex analysis’ central to the success of traders. This term refers to the practice of examining the change in currency pair prices and the forces that impact on such fluctuations, while it’s used by traders to help optimise their profitability.
Platforms such as the MT5 are home to increased advanced analytical tools, but what are the three primary types of forex market analysis? Can predictive analytics actually prove useful with these valuation models?
1. Technical Analysis
One of the most promising valuation models for forex investors using predictive analytics tools could be technical analysis. We’ll start with a definition of technical analysis, which refers to the application of a broad range of techniques that are used to try and forecast the future price movements of financial products.
Such analysis is typically based on historical price movements, trends and patterns, which is just one of the reasons why foreign exchange markets and asset classes are so well-suited to the deployment of technical analysis.
Also, the high levels of liquidity that define major currency pairs and the market’s susceptibility to long-term macroeconomic trends tends to create observable patterns that can prove hugely insightful over time.
Such trends may also empower short-term trading strategies, so technical analysis in forex can be exploited by traders of all shapes and sizes!
In theory, this could be the easiest way for forex traders to use predictive analytics. It is easier for machine learning algorithms to use histoic market data to forecast trends than it would be to use more intrinsic value models, because there is a more narrowly defined range of data to inspect.
2. Fundamental Analysis
Predictive analytics could also be used to forecast price movements with fundamental analysis valuation models, although this could prove to be trickier.
While technical analysis is focused on poring over charts to identify patterns and trends, fundamental analysis involves utilizing economic data reports and relevant news headlines.
This type of analysis also tends to draw insights from large and unstructured datasets such as social media, with input from global leaders and economists particularly telling at different times.
You can use customised economic calendars through your forex trading platform to analyse real-time markets and make more informed decisions, with a clear focus on macroeconomic factors and geopolitical news.
Predictive analytics models are likely to eventually be very effective at inferring forex price movements with fundamental analysis models. However, they will need a large database of heterogeneous variables that influence price movements and the ability to conduct regression analyses based on historic market changes.
3. Sentiment Analysis
We close with sentiment analysis, which focuses on the feelings and optimism of traders who invest in currencies on a daily basis.
More specifically, forex sentiment is the overall feeling of which market participants perceive the performance of a particular currency pair, which in turn determines their trading decisions pertaining to the procurement and sale of assets.
Despite the focus on determinism and technical analysis, we cannot deny that sentiment is an important component of what drives forex price fluctuations, so understanding and leveraging this can prove highly beneficial over time.
It can also afford you a competitive advantage as a trader, so long as you strike a keen balance and don’t let your emotions or instinct negate technical and fundamental analysis completely.
Due to the utilization of technical analysis strategies in this application, it could be ideal to use predictive analytics technology to conduct sentiment analysis. It might be more difficult than with technical analysis, but easier than with fundamental analysis.
Predictive Analytics Could
Dramatically Alter the Future of Forex Trading
Predictive analytics technology has tremendous potential in the field of investment valuation. Forex trading is no exception. Savvy forex traders are likely to rely heavily on this new technology to get the greatest possible return on their investments.
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