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 16 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:

Monthly Forecast December 2018

For the month of January, we forecast that the best trades would be short USD/JPY and long USD/CAD. The performance to date is as follows:

For the month of December, we forecast that the best trades would be short EUR/USD, short GBP/USD, and long USD/JPY. 

The final performance was as follows:

Weekly Forecast January 7

We made no forecast last week, as there were no exceedingly strong counter-trend moves. We again make no forecast this week as the only strong counter-trend move was against a very weak downwards trend in the CAD/CHF currency cross.

44% of the important currency pairs or crosses moved by more than 1% in value over the past week. Volatility has increased substantially and is most likely to remain at a similar level over the coming week.

This week has been dominated by relative strength in the Canadian Dollar, and relative weakness in the U.S. Dollar.

Previous Monthly Forecasts

You can view the results of our previous monthly forecasts here.

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:

EUR/USD

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

We had expected the level at 1.1306 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 rejected this level just after the New York close last Wednesday, marked by the up arrow in the price chart below, forming double bearish inside candlesticks which broke up as the Asian session got underway. Such candlesticks are often useful indicators of reversals when their wicks or the wick of the structure rejects key levels. This trade was profitable, achieving a maximum positive reward to risk ratio of more than 1 to 1 so far.

AUD/USD

We had expected the level at 0.6827 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 rejected this level after making a huge spike down just before the New York close last Wednesday, marked by the up arrow in the price chart below, forming a bullish inside candlestick which broke up right away. This is often a great time of day to enter trades involving North American and Asian currencies such as the U.S. and Australian Dollars, and reversal candlesticks after huge sudden movements such as this are often useful indicators of reversals when their wicks or the wick of the structure rejects key levels. This trade has been profitable, achieving a maximum positive reward to risk ratio of more than 1 to 1 so far. The profit factor would be much higher if a partial stop was used instead of placing a stop underneath the reversal structure.