Trading Support and Resistance - 24 January 2016

This week we’ll begin with our monthly and weekly forecasts of the currency pairs worth watching. The first part of our forecast is based upon our research of the past 11 years of Forex prices, which show that the following methodologies have all produced profitable results:

* Trading the two currencies that are trending the most strongly over the past 3 months.

* Assuming that trends are usually ready to reverse after 12 months.

* Trading against very strong counter-trend movements by currency pairs made during the previous week.

* Buying currencies with high interest rates and selling currencies with low interest rates.

Let’s take a look at the relevant data of currency price changes and interest rates to date, which we compiled using a trade-weighted index of the major global currencies:

Table 01

Monthly Forecast January 2016

This month, we forecasted that the USD will rise against the GBP, CHF and CAD, suggesting long USD/CHF and USD/CAD and short GBP/USD trades. The performance of the forecast overall so far has been very positive:

Table 2

Weekly Forecast 24th January 2016

Last week, we made no weekly forecasts.

This week, we forecast that AUD/USD will fall, and USD/CAD will rise, as at the close of the week.

This week began in the same way as last week. We saw continuing strength in the safety currencies such as the USD and JPY, and also in the EUR, and weakness in the CAD, AUD, and the GBP. However the end of the week saw a complete reversal in this picture, with the formerly stronger currencies weakening and vice versa with a particularly spectacular rise in the value of the CAD.

Volatility was even higher than the previous week, with 74% of the major and minor currency pairs changing in value by more than 1%. In fact it was the most volatile week overall in recent months. Volatility is likely to continue this week, as there is more key economic data due.

You can trade our forecasts in a real or demo Forex brokerage account.

Key Support/Resistance Levels for Popular Pairs

At the FX Academy, we teach that trades should be entered and exited at or very close to key support and resistance levels. There are certain key support and resistance levels that should be watched on the more popular currency pairs this week, which might result in either reversals or breakouts:Table 12

Let’s see how trading two of these key pairs last week off key support and resistance levels could have worked out:

GBP/USD

We had expected the level at 1.4350 might act as resistance, as it had acted previously as both support and resistance. Note how these “flipping” levels can work really well. The H1 chart below shows how during last Friday’s London / New York overlap session, the price tried to rise above the level and failed, forming a bearish dark cloud cover candlestick marked by the down arrow, which immediately broke down. This was also extremely close to a rejection of a clearly defined long-term bearish trend line as well as a psychologically important half number. This trade has given a good reward to risk ratio of more than 2:1 already.

GBPUSD

USD/JPY

We had expected the level at 116.08 might act as support, as it had acted previously as both support and resistance. Note how these “flipping” levels can work really well. The H1 chart below shows how during last Wednesday’s early London session, the price fell sharply to that level which held quite precisely, and then formed a bullish outside candle marked by the up arrow, which took a while to break up. Nevertheless even an entry at the eventual break of the candlestick would still have given a good reward to risk ratio of more than 2:1 so far.

USDJPY

You can trade our forecasts in a real or demo Forex brokerage account to test the strategies and strengthen your self-confidence before investing real funds.

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.