Trading Support And Resistance For Popular Currency Pairs

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:

Monthly Forecast November 2016

This month we forecast that the highest-probability trade will be long USD/CAD. The performance so far is positive:

Weekly Forecast 27th November 2016

Two weeks ago, we made no forecast.

This week, we again make no forecast, as the only strong counter-trend movement was in GBP/JPY, but this push looks likely to continue.

This week has been dominated by relative strength in the Australian Dollar and British Pound, and relative weakness in the Japanese Yen. It is the weakness of the Yen that stands out most strongly.

Volatility was a little less than it was last week, with 52% of the major and minor currency pairs changing in value by more than 1%. Volatility might well begin to rise again over this coming week, as there is a heavier news schedule, including U.S. Non-Farm Payrolls data.

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:

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 1.2502 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 during the New York/London session overlap last Monday, a time which can be crucial for this currency pair. Entry was signaled by the large bearish pin candle which formed immediately as the price was hit, marked by the down arrow within the chart below. Its high was slightly exceeded, by about 1 pip, during the subsequent Asian session, which is unusual for this pair. This second short trade gave a huge maximum reward to risk ratio of about than 7 to 1 so far, if the stop had been placed just above the high of the entry candlestick.

AUD/USD

We had expected the level at 0.7443 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 hit this level late during the Asian session last Wednesday, a time which can be crucial for this currency pair. Entry was signaled by the small bearish doji candle which formed immediately as the price was hit, marked by the down arrow within the chart below. This long trade gave a large maximum reward to risk ratio of more than 6 to 1, if the stop had been placed just above the high of the entry candlestick.