Prediction, speculation, future trading, all these terms, seem too superficial to be actually true and effective in the hard hitting practical market of Currency Exchange and other financial tools, right? Well, you are not wrong, but imagine this scenario. Calculated predictions and informed speculation, when implemented in the financial market for the management of your investment portfolio can wield wonders in terms of profits and surely that is something that you would love to have at your disposal, isn’t it?
Well, this is why it is important to be able to identify the various economic trends around the world, in your own country and other related fields in order to be able to predict the fluctuations in the currency rates perfectly. Here are 3 tips to enable you for the same:
1. Identifying The Purchasing Power Parity
What is purchasing power? It is the amount of commodity that you can purchase for consumption with a given amount of money. When the purchasing power in 2 countries is at an equality state, then there is no need for an currency exchange rate between these two countries (or it can be stated for the sake of economics and mathematics that the exchange rate is 1). The state of equality of currency means that the same amount the currency of 1 country can purchase the same amount of the commodity in question,
But, this is not the case in practical life, is it? That is why the difference in the inflation rates of two economies is taken into consideration when the purchasing power parity is being compared. The country with the higher inflation rate is at a weaker currency standpoint when compared to the country with a lower inflation rate. By calculating the difference in the inflation rates between the economies of the two countries, you can predict the exchange rate more or less accurately.
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2. Using Econometrics
No, you will not need to run to the nearest college and get yourself registered for an additional course in economics and advanced mathematics. But, the knowledge of basic and entry level econometrics will greatly benefit you when it comes to something as important as predicting the currency exchange rates.
You will be required to create a mathematical model by analyzing the various factors of the economies that usually affect the exchange rates. For example, the GDP of the countries in question, interest rates, growth rates of the GDPs, et al. Remember that this process will require time and knowledge on your part. But the benefits accruing from this are immense and you will be raking in the profits soon enough.
3. Time Series Data Analysis
There is yet another prevalent but expertise-requiring method of predicting the currency exchange rates of two or more countries. It is analyzing the above stated attributes against a time series data table to observe trends and identify other factors that will hint at the change and the degree of change of the currency rates.
Remember that predicting the exchange rates of the currencies is not an easy task and you will need to gather substantial theoretical knowledge in order to be rest assured about the accuracy of your findings.