Trading Support and Resistance - 4 June 2017

Each week we like to send out our thoughts on the Forex market, not only to highlight potential trade set-ups for you to watch out for, but also to enhance your learning with some real-time market analysis. 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 June 2017

Last month we forecasted that the highest-probability trades would be long GBP/USD and USD/CAD. The overall performance was negative:Table 02

This month, we forecast the highest-probability trade will be long EUR/USD.

Weekly Forecast 4th June 2017

Last week, we forecasted that the EUR/NZD currency cross would rise in value. Unfortunately, it fell slightly, by 0.22%.

This week, we make no forecast.

This week has been dominated by relative strength in the New Zealand Dollar and the Euro, and relative weakness in the Australian and U.S. Dollars.

Volatility was lower than it was last week, with only 26% of the major and minor currency pairs changing in value by more than 1%. Volatility is likely to be greater over this coming week. You can trade our forecasts in a real or demo Forex brokerage account.

Key Support/Resistance Levels for Popular Pairs

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:

EUR/USD

We had expected the level at 1.1250 might act as resistance, as it had acted previously as both support and resistance. Note how these “flipping” levels can work well. The H1 chart below shows the how the price initially hit this level and formed a bearish outside candle during the New York session last Wednesday. This could have provided a short trade entry, marked by the first down arrow towards the left in the chart below, but would have been stopped out a few hours later. There was another entry opportunity during the subsequent Asian session when the price again rejected the level with a bearish pin candle providing a better entry, marked by the second down arrow shown in the chart. This short trade gave an acceptable reward to risk ratio of approximately 2 to 1 to date, if the stop had been placed just above the swing high at the entry candlestick.

EURUSD

GBP/USD

We had expected the level at 1.2772 might act as support, as it had acted previously as both support and resistance. Note how these “flipping” levels can work well. The H1 chart below shows the how the price hit this level and formed a bullish engulfing candle early in the London session last Wednesday, which is typically a productive time of day to trade this pair. This provided a long trade entry, marked by the up arrow shown in the chart below. This long trade has so far given an excellent reward to risk ratio of approximately 2 to 1 to date, if the stop had been placed just below the swing low at the entry candlestick.

GBPUSD

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.