Getting Past The Forex Market Forecast Limitations

Observe the sequence: 1, 2, 3, 4, 5, 6. What is the number that follows next? Yes! It is 7. In this case, predicting the next digit seems like an easy task, though this builds the basis for successful forex predictions. Your brain has to be comfortable in recalling numbers and retaining them as and when required so that you could solve the puzzle correctly.

Let's look at another example: 1, 2, 3, 5, 8, 13, 21. It will be obvious to most people that the next number in line is 34. The sum of the preceeding two numbers gies the next number in the series. As a trader, you should remember the above series as the Fibonacci series that is primary to a lot of things in nature, including forex price movements.

These cases simply tell you how tough it is for a forex trader to predict the numbers in the price movement of the markets. Your excellence in doing this task is going to show your Forex Trading Intelligence Quotient, or the FX I.Q. One good beginning point to examine your FX I.Q. level is to test them against a chain of occurrences that are seemingly random, take the case of the Florida hurricanes say.

First of all, you have no way of telling when or where a hurricane will hit. Although science can say whether a hurricane is on its way or not, it has no way of predicting if one will happen a month from now. This is because of the Lorenz Butterfly Effect, rightfully named after the M.I.T professor who ended up founding a new field of science called Chaos Theory. His research on meteorology had resulted in the famous phenomenon known as the Butterfly Effect.

The butterfly effect simply says that it is hard to predict when the initial conditions are hard to determine and the system is complex. He had shown that the starting of a hurricane is influenced by so many factors that even a butterfly flapping its wings near the starting point can change the copious initial conditions such that the hurricane goes off on a tangent altogether. In other words, to predict a hurricane successfully, we would have to monitor each minute condition that affects its formation. Even a tiny omission can mean that the predictions will be supremely off the mark.

Forex market prices and hurricanes are simialar when it comes to predicting their values. You cannot find out all the variables that rule the behavior of the system of currency pair in the forex market, and hence you cannot say what is going to come out next. This is the primary cause why all of the prediction methods, neural nets, trading systems and so on, have limits on their correctness. The projections that are made like this, with computer-based processes, are significantly defective as they cannot take into account all the factors of the market.

They are vulnerable to the butterfly effect. Leaving out even one factor can drastically affect the outcome. Yet, sudden patterns and themes in the data can be employed to initiate safer foretellings about the movements of the currency pair and its behavior in general. The major part in all of this is that of pattern recognition and subsequent analysis, making it hard for most systems to remain trustworthy all the time.

The only way by which you can hope to fuel your FX I.Q. scores is that you memorize all those patterns that you noticed while a trade went really well. Forex prices and markets may seem chaotic but they are not random, although it can seem to be when you are trading due to the incompleteness of our knowledge. Forex prices combine the feelings associated with more than $2 trillion worth of assets and hence the patterns that recur do so in a fog of diffusiveness.

By understanding the basis of intelligence in forex trading, the recipe for becoming smarter can be developed. Evaluating how you trade is the first step in this regard to improve your FX I.Q. Then, test yourself if you can come up with a sequence of winning trades. The important thing that you should not miss out on is the trading patterns, do not be worked up with the trades themselves.

If you manage to get more than seven or eight winnings in a series then you can say that it is not just luck. The trader uses the information of the past to guess smartly (using his honed memory skills and pattern identifying abilities) where the market is headed. With experience and schooling in the right manner, you can earn the ability to sustain wins in a row, and it is no more a theory concept. It is in the reach of anyone who cares to go forth. All it demands is an augmentation of your FX I.Q.

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