Forex Forecast: Quant vs. Chart Reading - 28 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

 

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

 

Last week saw resumption in USD strength across the board. However, the picture is mixed now and it may be that we are entering an unclear period where there is no overwhelming strong trend in the market. The summer months of July and August tend to be a period lacking clear trends.

Summary

This week, the quantitative and technical forecasts diverge to a large extent. The quantitative forecast sees the USD falling across the board next week.

Next week, we will review how these forecasts performed.

 

Previous Forecasts

These forecasts have been running for 28 weeks.

Last week, the quantitative and technical forecasts were the same with the exception of the USD/JPY forecast. The technical forecast was 100% wrong, the quantitative forecast was also poor. The results were as follows:

Chart 3

 

The running totals of the forecasts after 28 weeks so far are as follows:

Chart 4

 

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 somewhat 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.