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Forex Forecast: Quant vs Chart Reading - 1 February 2015

By Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.

Quantitative Forecast

Academic studies have shown that the most reliable way to determine future price movements from past price movements, is by use of momentum.

In the Forex market, a momentum study is best applied to the four major Forex currency pairs by simply checking whether the weekly close is above or below the weekly close 13 weeks ago.

If the price is higher, the statistical edge is in trading that pair long.

If the price is lower, the statistical edge is in trading that pair short.

On this basis, the quantitative momentum forecast for the edge during the coming week is as follows:

Chart 1

Technical Forecast

The question as to whether an experienced chart-reading technical analyst can outperform a simple momentum model warrants a live experiment. Looking at the weekly charts for each of the four major pairs, I will try to determine the line of least resistance, and forecast the directional edge using my own technical analysis.

On this basis, my technical analysis forecast for the edge during the coming week is as follows:Chart 2 2115

Last week saw a pull back against the bullish USD trend. The JPY also seems to be relatively strong and in a consolidation phase against the USD; therefore technically I am again forecasting a fall in USD/JPY over the coming week. Regarding the other pairs, there is no obvious strong support or resistance blocking a continued advance of the USD, so my technical forecast for those pairs follows the quantitative momentum forecast, with the exception of USD/CHF. This pair is behaving strangely and the CHF is plummeting rapidly. Therefore I expect the weakening in the CHF to continue. Generally, it would be wise to trade the CHF in very small position sizes.

Summary

The quantitative and technical forecasts agree that the USD will strengthen against the EUR and GBP, but technically I see the JPY and CHF – especially the CHF – as likely to strengthen against the USD next week.

Next week, we will review how these forecasts performed.

Previous Forecasts

These forecasts have been running for 8 weeks.

Last week, both the technical and quantitative forecasts were wrong about everything, except the Technical forecast did correctly predict that the JPY would rise against the USD.

Chart 3 2115

 

The running totals of the forecasts after 6 weeks so far are as follows:

Chart 4 2115

 

Both forecasts have performed negatively to date, due to the very sharp and historically unprecedented counter-trend moves in the CHF over the previous 3 weeks. If not for these move, the Quantitative forecast would be performing quite well, and the Technical forecast would also be profitable.

Adam Lemon
About Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.

 

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