Forex Forecast: Quant Vs. Chart Reading
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:
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:
Last week saw resumption in USD strength except against the Euro. However, at the end of the week the picture is starting to look like a renewal of USD strength.
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 29 weeks.
Last week, the quantitative and technical forecasts were the regarding the Yen and the British Pound but differed on the Euro and Swiss Franc. The quantitative forecast performed better this week. The results were as follows:
The running totals of the forecasts after 29 weeks so far are as follows:
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 a little 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!
Currency Pairs
Disclosure: None.
Comments
