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:

Chart 1 122814

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 122814

Last week saw continuing momentum in the direction of the bullish USD trend. There is no reason to doubt the probability of this to continue next week, and there are no obvious support or resistance levels blocking the way. Therefore my technical forecast follows the quantitative momentum forecast.

Summary

The quantitative and technical forecasts agree on USD/JPY and GBP/USD, and disagree on EUR/USD and USD/CHF.

Next week, we will review how these forecasts performed.

Previous Forecasts

These forecasts have been running for 3 weeks.

The quantitative forecast was completely correct last week in forecasting the directions of all the four major pairs. The technical forecast was wrong where it deviated from the quantitative forecast in predicting a rise for EUR/USD and a fall for USD/CHF.

Chart 3 122814

The running totals of the forecasts after 3 weeks so far are as follows:

Chart 4 122814

The quantitative forecast has performed profitably to date.

Disclosure: None. 

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