Forex Forecast: Quant vs. Chart Reading - 7 June 2015

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 6715

 

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 6715

 

Last week saw a continuation in the strengthening of the USD across the board except against the CHF. There is a strong USD trend emerging but technically, with the exception of the USD/JPY pair, we are still within in areas of price that are likely to tend towards consolidation, which could slow trend movement. Therefore I believe the EUR and GBP are likely to bounce back this week, at least a little.

Summary

The quantitative and technical forecasts differ with the exception of USD/JPY which shows a clear long bias in every way.

Next week, we will review how these forecasts performed.

Previous Forecasts

These forecasts have been running for 25 weeks.

Last week, the quantitative and technical forecasts were identical, and both performed slightly positively. The results were as follows:

Chart 3 6715

The running totals of the forecasts after 25 weeks so far are as follows:

Chart 4 6715

 

Both forecasts have performed negatively to date, due solely to the very sharp and historically unprecedented counter-trend moves in the CHF over recent months. Excluding the USD/CHF pair, both have performed positively, but the technical forecast has performed notably better.

This might suggest that trading strategies can perform best when they are guided mathematically but subjected to a human element which can act to overrule it when it “feels” wrong. So far, the human is beating the machine!

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.