Methods for judging the trend of foreign exchange?

The difficulties in forex trading are twofold: first, distinguishing whether the market trend is a bull, bear, or consolidation pattern; second, overcoming the human tendency to trade against the trend. To address these challenges, one must continuously accumulate experience and enhance understanding while diligently analyzing both fundamental and technical aspects. There is no shortcut other than this.

Let the trend be your friend.

Under a floating exchange rate system, any foreign exchange market has only three types of trends: rising, falling, or consolidation. In the forex market, consolidation trends account for about 70%-80% of each year's trading days, while the remaining 20%-30% belong to bull or bear markets. During consolidation trends, investors need to identify the consolidation range first, then sell at the upper end of the range and buy at the lower end—commonly known as buying low and selling high—to make a profit. This way, the risk will not be too great. If investors can rationally implement stop-loss strategies, they may even increase their investment amount to gain higher profits.

However, most people in the market still aim to seize the 20%-30% bull or bear markets opportunistically by following the trend. The main reason is that the profits from following the trend are very attractive, and the frequency of stop-loss exits is relatively low, thus significantly reducing additional costs. Moreover, those who follow the trend are practitioners rather than inventors; they just need to conduct business according to the existing market trend, which falls under the category of "easy to know and easy to do." Therefore, market participants feel that "the trend is your friend" (Trend is your friend). However, there are two problems in actual trading: one is how to distinguish whether the market is a bull, bear, or consolidation trend; the other is that "trading against the trend" is an extremely difficult human weakness to overcome. Overcoming human weaknesses can usually be achieved through accumulating experience and learning from losses to enhance awareness. As for how to distinguish whether the market is a bull, bear, or consolidation trend, it must be determined by analyzing both fundamental and technical aspects.

When operating in the forex market, whether as a buyer or seller, the basic premise should be to first predict the future price of the investment target, then decide on the investment strategy and operational direction based on that prediction. For example, when investors are optimistic about the dollar against the yen, it means they believe the dollar will enter a bull market pattern while the yen will enter a bear market pattern. Therefore, they should buy dollars and sell yen, meaning taking a long position in dollars and a short position in yen. If this prediction is correct, investors will make a profit.

To analyze the fundamentals, analysts believe that the strength or weakness of a currency reflects the economic conditions of a country. Although the strength or weakness of a currency may temporarily fluctuate due to non-economic factors or produce movements contrary to the economic fundamentals, in the long term, its value will eventually return to a level commensurate with the economic situation. As for how to measure the good or bad economic conditions of a country, a relative comparison method must be adopted. For example, the estimated economic growth rate of the United States in 1996 was 3%. From the perspective of fundamental analysts, this data alone cannot determine whether the dollar should strengthen or weaken; it must be compared with the previous year's economic growth rate and also with the economic growth rates of major countries such as Germany and Japan. If the U.S. economic growth rate was 2% the previous year, and the economic growth rates of Germany and Japan were approximately 1.5% in 1996, then this 3% data suggests to fundamental analysts that the U.S. economy is gradually improving, and its economic growth status is better than that of Germany and Japan. Therefore, the dollar should relatively strengthen against the mark or yen, reflecting its economic power. Fundamental analysts use this as an indicator for making forex trading decisions, buying dollars and selling yen or marks.

Data reflecting the economic conditions of a country, commonly referred to as economic indicators, include many categories besides the economic growth rate, such as trade deficits, budget deficits, money supply, consumer price index (retail price index), producer price index (wholesale price index), unemployment rate, housing start rate, leading indicators, etc. These data are regularly published by relevant government departments and serve as focal points for fundamental analysts. Investors collect and analyze these data, further analyze and compare them, and use them as a basis for determining the future trends of various inclinations.

Is this type of analysis and prediction accurate? What are the results? We can look at international investors, who widely establish economic research departments responsible for analyzing the economic conditions of major countries. Before important economic indicators are released by institutions like the U.S. government, market investors will first clear or reduce their forex positions, creating an atmosphere of great tension in the forex market, with bank traders staying up all night. From the reactions after the release of economic indicators, we can see that fundamental analysis indeed holds significant influence in the forex market.

After the release of economic indicators, the currency trends are affected, with strong currencies possibly becoming stronger or turning weak, and weak currencies possibly becoming weaker or turning strong. This reveals the true picture of "economic indicators as market movers" (Market mover). Such influential factors cannot be ignored by forex participants. Therefore, regardless of the accuracy of fundamental analysis in predicting future currency market trends, fundamental analysis has long been the guiding principle for market participants' investment decisions.

Fundamental analysis is suitable for predicting medium- to long-term trends.

Using fundamental analysis to predict medium- to long-term currency trends, such as 6 months, 1 year, or 2 years, is relatively appropriate. However, since the gold standard was abolished and the international floating exchange rate system was implemented, factors outside of fundamentals also affect currency prices to varying degrees. For example, the scale of the forex market has continued to expand, with more and more people participating in forex investments. The daily trading volume of the international forex market has increased from $800 billion in 1994 to $1.2 trillion in 1995 and 1996, with 80%, or about $1 trillion, of the trading volume being speculative transactions. Speculators buy and sell every moment in the international market, and large-scale transactions also affect forex trends.

As the entire international society becomes increasingly open, akin to a global village, the freedom of international capital inflows and outflows into various countries has improved. International payment systems such as CHIPS in the U.S. and CHAPS in the UK have accelerated the speed of fund transfers, which can now be completed almost instantly. International funds are like having wings, giving rise to hot money, which not only influences the monetary policies of various countries but also often distorts the reasonable currency prices that should reflect the fundamentals, causing a temporary failure of fundamental analysis. Therefore, forex investors have gradually adjusted the application of fundamentals, using them not only as tools for predicting medium- to long-term trends but also combining them with technical analysis data to make investment decisions.

Fundamental analysis of forex trends has a long history, and the "purchasing power parity theory" mentioned in textbooks is a typical example. The basic theory of purchasing power parity states that the price relationship between different currencies is directly related to the quantity of goods that can be purchased with equal amounts of currency in different countries. For example, if it costs $1 in the U.S., ¥100 in Japan, and DM1.5 in Germany to buy one egg, it can be inferred that $1, ¥100, and DM1.5 have the same purchasing power. Therefore, the currency prices should be $1 = ¥100 = DM1.5. However, if this theory is compared with current forex prices, it can be found that a certain currency is overvalued or undervalued. Additionally, the selection of goods affects the calculated purchasing power of the currency, and the degree of overvaluation or undervaluation may vary. For instance, according to data provided by the economic research department of Merrill Lynch in the U.S., in April 1996, compared to the purchasing power of the dollar, the overvalued currencies were the yen, mark, Swiss franc, and New Zealand dollar, with overvaluation rates of 35%, 20%, 10%, and 9%, respectively. The undervalued currencies were the pound sterling, Canadian dollar, French franc, and Australian dollar, with undervaluation rates of 20%, 16%, 8%, and 4%, respectively.

Today's forex market has long departed from the fixed exchange rate era, so everything from political and economic news to rumors and hearsay can shake the market. Simply relying on purchasing power parity theory to infer the proper value of a currency is clearly too simplistic, and investors can only use the currency prices derived from this theory as a reference.

Methods for identifying forex trends—

One difficulty in forex trading is distinguishing whether the market is a bull, bear, or consolidation pattern, and the other is overcoming the human tendency to trade against the trend. To address these, one must continuously accumulate experience and enhance understanding while diligently analyzing both fundamental and technical aspects. There is no shortcut other than this.

Let the trend be your friend.

Under a floating exchange rate system, any foreign exchange market has only three types of trends: rising, falling, or consolidation. In the forex market, consolidation trends account for about 70%-80% of each year's trading days, while the remaining 20%-30% belong to bull or bear markets. During consolidation trends, investors need to identify the consolidation range first, then sell at the upper end of the range and buy at the lower end—commonly known as buying low and selling high—to make a profit. This way, the risk will not be too great. If investors can rationally implement stop-loss strategies, they may even increase their investment amount to gain higher profits.

However, most people in the market still aim to seize the 20%-30% bull or bear markets opportunistically by following the trend. The main reason is that the profits from following the trend are very attractive, and the frequency of stop-loss exits is relatively low, thus significantly reducing additional costs. Moreover, those who follow the trend are practitioners rather than inventors; they just need to conduct business according to the existing market trend, which falls under the category of "easy to know and easy to do." Therefore, market participants feel that "the trend is your friend" (Trend is your friend). However, there are two problems in actual trading: one is how to distinguish whether the market is a bull, bear, or consolidation pattern; the other is that "trading against the trend" is an extremely difficult human weakness to overcome. Overcoming human weaknesses can usually be achieved through accumulating experience and learning from losses to enhance awareness. As for how to distinguish whether the market is a bull, bear, or consolidation pattern, it must be determined by analyzing both fundamental and technical aspects.

In forex market operations, whether as a buyer or seller, the basic premise should be to first predict the future price of the investment target, then decide on the investment strategy and operational direction based on that prediction. For example, when investors are optimistic about the dollar against the yen, it means they believe the dollar will enter a bull market pattern while the yen will enter a bear market pattern. Therefore, they should buy dollars and sell yen, meaning taking a long position in dollars and a short position in yen. If this prediction is correct, investors will make a profit.

Mastering the analysis of fundamentals through data.

Fundamental analysts believe that the strength or weakness of a currency reflects the economic conditions of a country. Although the strength or weakness of a currency may temporarily fluctuate due to non-economic factors or produce movements contrary to the economic fundamentals, in the long term, its value will eventually return to a level commensurate with the economic situation. As for how to measure the good or bad economic conditions of a country, a relative comparison method must be adopted. For example, the estimated economic growth rate of the United States in 1996 was 3%. From the perspective of fundamental analysts, this data alone cannot determine whether the dollar should strengthen or weaken; it must be compared with the previous year's economic growth rate and also with the economic growth rates of major countries such as Germany and Japan. If the U.S. economic growth rate was 2% the previous year, and the economic growth rates of Germany and Japan were approximately 1.5% in 1996, then this 3% data suggests to fundamental analysts that the U.S. economy is gradually improving, and its economic growth status is better than that of Germany and Japan. Therefore, the dollar should relatively strengthen against the mark or yen, reflecting its economic power. Fundamental analysts use this as an indicator for making forex trading decisions, buying dollars and selling yen or marks.

Data reflecting the economic conditions of a country, commonly referred to as economic indicators, include many categories besides the economic growth rate, such as trade deficits, budget deficits, money supply, consumer price index (retail price index), producer price index (wholesale price index), unemployment rate, housing start rate, leading indicators, etc. These data are regularly published by relevant government departments and serve as focal points for fundamental analysts. Investors collect and analyze these data, further analyze and compare them, and use them as a basis for determining the future trends of various inclinations.

Is this type of analysis and prediction accurate? What are the results? We can look at international investors, who widely establish economic research departments responsible for analyzing the economic conditions of major countries. Before important economic indicators are released by institutions like the U.S. government, market investors will first clear or reduce their forex positions, creating an atmosphere of great tension in the forex market, with bank traders staying up all night. From the reactions after the release of economic indicators, we can see that fundamental analysis indeed holds significant influence in the forex market.

After the release of economic indicators, the currency trends are affected, with strong currencies possibly becoming stronger or turning weak, and weak currencies possibly becoming weaker or turning strong. This reveals the true picture of "economic indicators as market movers" (Market mover). Such influential factors cannot be ignored by forex participants. Therefore, regardless of the accuracy of fundamental analysis in predicting future currency market trends, fundamental analysis has long been the guiding principle for market participants' investment decisions.

Fundamental analysis is suitable for predicting medium- to long-term trends.

Using fundamental analysis to predict medium- to long-term currency trends, such as 6 months, 1 year, or 2 years, is relatively appropriate. However, since the gold standard was abolished and the international floating exchange rate system was implemented, factors outside of fundamentals also affect currency prices to varying degrees. For example, the scale of the forex market has continued to expand, with more and more people participating in forex investments. The daily trading volume of the international forex market has increased from $800 billion in 1994 to $1.2 trillion in 1995 and 1996, with 80%, or about $1 trillion, of the trading volume being speculative transactions. Speculators buy and sell every moment in the international market, and large-scale transactions also affect forex trends.

As the entire international society becomes increasingly open, akin to a global village, the freedom of international capital inflows and outflows into various countries has improved. International payment systems such as CHIPS in the U.S. and CHAPS in the UK have accelerated the speed of fund transfers, which can now be completed almost instantly. International funds are like having wings, giving rise to hot money, which not only influences the monetary policies of various countries but also often distorts the reasonable currency prices that should reflect the fundamentals, causing a temporary failure of fundamental analysis. Therefore, forex investors have gradually adjusted the application of fundamentals, using them not only as tools for predicting medium- to long-term trends but also combining them with technical analysis data to make investment decisions.

Fundamental analysis of forex trends has a long history, and the "purchasing power parity theory" mentioned in textbooks is a typical example. The basic theory of purchasing power parity states that the price relationship between different currencies is directly related to the quantity of goods that can be purchased with equal amounts of currency in different countries. For example, if it costs $1 in the U.S., ¥100 in Japan, and DM1.5 in Germany to buy one egg, it can be inferred that $1, ¥100, and DM1.5 have the same purchasing power. Therefore, the currency prices should be $1 = ¥100 = DM1.5. However, if this theory is compared with current forex prices, it can be found that a certain currency is overvalued or undervalued. Additionally, the selection of goods affects the calculated purchasing power of the currency, and the degree of overvaluation or undervaluation may vary. For instance, according to data provided by the economic research department of Merrill Lynch in the U.S., in April 1996, compared to the purchasing power of the dollar, the overvalued currencies were the yen, mark, Swiss franc, and New Zealand dollar, with overvaluation rates of 35%, 20%, 10%, and 9%, respectively. The undervalued currencies were the pound sterling, Canadian dollar, French franc, and Australian dollar, with undervaluation rates of 20%, 16%, 8%, and 4%, respectively.

Today's forex market has long departed from the fixed exchange rate era, so everything from political and economic news to rumors and hearsay can shake the market. Simply relying on purchasing power parity theory to infer the proper value of a currency is clearly too simplistic, and investors can only use the currency prices derived from this theory as a reference.

Methods for identifying forex trends—

One difficulty in forex trading is distinguishing whether the market is a bull, bear, or consolidation pattern, and the other is overcoming the human tendency to trade against the trend. To address these, one must continuously accumulate experience and enhance understanding while diligently analyzing both fundamental and technical aspects. There is no shortcut other than this.

Let the trend be your friend.

Under a floating exchange rate system, any foreign exchange market has only three types of trends: rising, falling, or consolidation. In the forex market, consolidation trends account for about 70%-80% of each year's trading days, while the remaining 20%-30% belong to bull or bear markets. During consolidation trends, investors need to identify the consolidation range first, then sell at the upper end of the range and buy at the lower end—commonly known as buying low and selling high—to make a profit. This way, the risk will not be too great. If investors can rationally implement stop-loss strategies, they may even increase their investment amount to gain higher profits.

However, most people in the market still aim to seize the 20%-30% bull or bear markets opportunistically by following the trend. The main reason is that the profits from following the trend are very attractive, and the frequency of stop-loss exits is relatively low, thus significantly reducing additional costs. Moreover, those who follow the trend are practitioners rather than inventors; they just need to conduct business according to the existing market trend, which falls under the category of "easy to know and easy to do." Therefore, market participants feel that "the trend is your friend" (Trend is your friend). However, there are two problems in actual trading: one is how to distinguish whether the market is a bull, bear, or consolidation pattern; the other is that "trading against the trend" is an extremely difficult human weakness to overcome. Overcoming human weaknesses can usually be achieved through accumulating experience and learning from losses to enhance awareness. As for how to distinguish whether the market is a bull, bear, or consolidation pattern, it must be determined by analyzing both fundamental and technical aspects.

In forex market operations, whether as a buyer or seller, the basic premise should be to first predict the future price of the investment target, then decide on the investment strategy and operational direction based on that prediction. For example, when investors are optimistic about the dollar against the yen, it means they believe the dollar will enter a bull market pattern while the yen will enter a bear market pattern. Therefore, they should buy dollars and sell yen, meaning taking a long position in dollars and a short position in yen. If this prediction is correct, investors will make a profit.

Mastering the analysis of fundamentals through data.

Fundamental analysts believe that the strength or weakness of a currency reflects the economic conditions of a country. Although the strength or weakness of a currency may temporarily fluctuate due to non-economic factors or produce movements contrary to the economic fundamentals, in the long term, its value will eventually return to a level commensurate with the economic situation. As for how to measure the good or bad economic conditions of a country, a relative comparison method must be adopted. For example, the estimated economic growth rate of the United States in 1996 was 3%. From the perspective of fundamental analysts, this data alone cannot determine whether the dollar should strengthen or weaken; it must be compared with the previous year's economic growth rate and also with the economic growth rates of major countries such as Germany and Japan. If the U.S. economic growth rate was 2% the previous year, and the economic growth rates of Germany and Japan were approximately 1.5% in 1996, then this 3% data suggests to fundamental analysts that the U.S. economy is gradually improving, and its economic growth status is better than that of Germany and Japan. Therefore, the dollar should relatively strengthen against the mark or yen, reflecting its economic power. Fundamental analysts use this as an indicator for making forex trading decisions, buying dollars and selling yen or marks.

Data reflecting the economic conditions of a country, commonly referred to as economic indicators, include many categories besides the economic growth rate, such as trade deficits, budget deficits, money supply, consumer price index (retail price index), producer price index (wholesale price index), unemployment rate, housing start rate, leading indicators, etc. These data are regularly published by relevant government departments and serve as focal points for fundamental analysts. Investors collect and analyze these data, further analyze and compare them, and use them as a basis for determining the future trends of various inclinations.

Is this type of analysis and prediction accurate? What are the results? We can look at international investors, who widely establish economic research departments responsible for analyzing the economic conditions of major countries. Before important economic indicators are released by institutions like the U.S. government, market investors will first clear or reduce their forex positions, creating an atmosphere of great tension in the forex market, with bank traders staying up all night. From the reactions after the release of economic indicators, we can see that fundamental analysis indeed holds significant influence in the forex market.

After the release of economic indicators, the currency trends are affected, with strong currencies possibly becoming stronger or turning weak, and weak currencies possibly becoming weaker or turning strong. This reveals the true picture of "economic indicators as market movers" (Market mover). Such influential factors cannot be ignored by forex participants. Therefore, regardless of the accuracy of fundamental analysis in predicting future currency market trends, fundamental analysis has long been the guiding principle for market participants' investment decisions.

Fundamental analysis is suitable for predicting medium- to long-term trends.

Using fundamental analysis to predict medium- to long-term currency trends, such as 6 months, 1 year, or 2 years, is relatively appropriate. However, since the gold standard was abolished and the international floating exchange rate system was implemented, factors outside of fundamentals also affect currency prices to varying degrees. For example, the scale of the forex market has continued to expand, with more and more people participating in forex investments. The daily trading volume of the international forex market has increased from $800 billion in 1994 to $1.2 trillion in 1995 and 1996, with 80%, or about $1 trillion, of the trading volume being speculative transactions. Speculators buy and sell every moment in the international market, and large-scale transactions also affect forex trends.

As the entire international society becomes increasingly open, akin to a global village, the freedom of international capital inflows and outflows into various countries has improved. International payment systems such as CHIPS in the U.S. and CHAPS in the UK have accelerated the speed of fund transfers, which can now be completed almost instantly. International funds are like having wings, giving rise to hot money, which not only influences the monetary policies of various countries but also often distorts the reasonable currency prices that should reflect the fundamentals, causing a temporary failure of fundamental analysis. Therefore, forex investors have gradually adjusted the application of fundamentals, using them not only as tools for predicting medium- to long-term trends but also combining them with technical analysis data to make investment decisions.

Fundamental analysis of forex trends has a long history, and the "purchasing power parity theory" mentioned in textbooks is a typical example. The basic theory of purchasing power parity states that the price relationship between different currencies is directly related to the quantity of goods that can be purchased with equal amounts of currency in different countries. For example, if it costs $1 in the U.S., ¥100 in Japan, and DM1.5 in Germany to buy one egg, it can be inferred that $1, ¥100, and DM1.5 have the same purchasing power. Therefore, the currency prices should be $1 = ¥100 = DM1.5. However, if this theory is compared with current forex prices, it can be found that a certain currency is overvalued or undervalued. Additionally, the selection of goods affects the calculated purchasing power of the currency, and the degree of overvaluation or undervaluation may vary. For instance, according to data provided by the economic research department of Merrill Lynch in the U.S., in April 1996, compared to the purchasing power of the dollar, the overvalued currencies were the yen, mark, Swiss franc, and New Zealand dollar, with overvaluation rates of 35%, 20%, 10%, and 9%, respectively. The undervalued currencies were the pound sterling, Canadian dollar, French franc, and Australian dollar, with undervaluation rates of 20%, 16%, 8%, and 4%, respectively.

Today's forex market has long departed from the fixed exchange rate era, so everything from political and economic news to rumors and hearsay can shake the market. Simply relying on purchasing power parity theory to infer the proper value of a currency is clearly too simplistic, and investors can only use the currency prices derived from this theory as a reference.

Methods for identifying forex trends—