forex predictability of foreign exchange market

It is the study of historical price action in order to identify patterns and determine probabilities of future movements in the market through the use of technical studies, indicators, and other analysis tools. The main difference of this method from the fundamental analysis is that technical analysis looks for patterns in price movement, without considering the global factors that influences this movement.Technical analysis boils down to two things:identifying trendidentifying support/resistance through the use of price charts and/or time-framesMarkets can only do three things: move up, down, or sideways.Prices typically move in a zigzag fashion, and as a result, price action has only two states:Range – when prices zigzag sidewaysTrend – prices either zigzag higher (up trend, or bull trend), or prices zigzag lower (down trend, or bear trend)Example of Chart with market trendsTechnical analysisChart 6. Course dynamics GBP/USD for the period 23-25 April, 2019Source: www.fortrade.comGBP/USD Support & Resistance Table - 25/04/2019Support & ResistanceLevelExplanationResistance 21.2930Daily R2Resistance 11.2900Daily R1Support 11.2845Daily S1Support 21.2810Daily S2GBP/USD Indicator Table - 25/04/2019IndicatorSignalSMA 20SellSMA 50SellSMA 100SellMACD (12; 26; 9)SellRSI (14)NeutralStochastic ( 9; 6; 3)SellGBP/USD Indicator / Period Table - 25/04/2019Indicator / PeriodDay - SellWeek - SellMonth - SellMACD (12; 26; 9)SellSellSellRSI (14)NeutralSellSellSMA 20SellSellSellGBP/USD 25/04/2019 - Reference Price : 1.2871SELLSimple Moving AverageBuy (0)Sell (3)Technical Indicators - OscillatorsBuy (0)Sell (2)According to the Chart 6, GBP/USD extended losses on 24 April, falling to a fresh 10-week low of 1.28685. The UK pound failed to find support with the reports that UK Prime Minister Theresa May will not have to face another confidence vote until at least December, 2019. On Wednesday, the so-called 1922 Committee, which groups Conservative lawmakers, decided to keep current leadership rules unchanged despite the demands of some Brexit-backing MPs to oust May from her post earlier than current procedures allow. While the motion to change leadership rules was rejected, the 1922 Committee demanded a clear timetable for Prime Minister Theresa May's departure if her Brexit deal is rejected in parliament. This latest news affected the GBP/USD pair negatively and due to last summary table strongly recommend to sell. Pay attention to the indicator table (MACD, Stochastic, RSI) with signals “sell, buy or neutral”. Computer analysis Head and ShouldersChart 7. Head and ShouldersSource: www.tradingspine.comPRICE ACTION: • In an uptrend, price action finds first resistance (1) that forms left shoulder's high, where it reverse direction and goes downwards till finding support (2), completing the left shoulder formation (Chart 7. Head and Shoulders).• Price action reverses direction from that support (2) and goes upwards till finding second resistance (3) that forms head's high, where it reverses direction and goes downwards till finding support (4), completing the head formation. • Price action reverses direction from the last support (4) and goes upwards till finding third resistance (5) that forms right shoulder's high, where it reverses direction going downwards. • The pattern is completed when price action breaks the neckline at point (6) downwards.NOTES • Neckline is identified by drawing a trend-line connecting the two support levels that completed both the left shoulder and head formations, which are (2 - 4). • Both shoulders don't have to be of the same height. • Neckline can be skewed, usually to the same direction of the trend-line connecting both shoulders highs at points (1 - 5). • Volume usually decreases as the pattern is being formed, and increases when breaking or retesting the neckline. • This pattern is commonly found on medium and long-term time-frames.Now let’s have a look at real example of GBP/USD pair D1 - Breakout (6) 21-Nov-2017 - Chart from Oanda's MT4 platformChart 8. Head and Shoulders chart GBP/USD pairSource: www.tradingspine.comTrade setup: Trade entry: at the closing rate of the candle after breaking the neckline at point (6) Take profit: 398.0 pips - usual measurement applied from point (6) Stop loss 1: 159.1 pips (R:R 2.502) - set at 14% of target measurement, beyond absolute SL1 Stop loss 2: 311.7 pips (R:R 1.277) - set at 7% of target measurement, beyond absolute SL2Chart 9. Inverse Head and Shoulders chart GBP/USD pairSource: www.tradingspine.comCurrency: USD/GBP - H4 - Breakout (6) - 24-Aug-2016 - Chart from XM's MT4 platform Trade setup: Trade entry: at the closing rate of the candle after breaking the neckline at point (6) Take profit: 95.8 pips - usual measurement applied from point (6) Stop loss 1: 37.5 pips (R:R 2.555) - set at 14% of target measurement, beyond absolute SL1 Stop loss 2: 76.9 pips (R:R 1.246) - set at 7% of target measurement, beyond absolute SL2 Notes: • Pattern retested neckline twice, second retest almost hit SL1. • This pattern's duration and pip range is much less than what is common for an inverse head and shoulders, making it more vulnerable to higher-than-usual market volatility, an example of that is how close was the second retest from hitting SL1.2.3. Trading forecast strategy of the GBP for 01.05.2019 to 20.05.19 and resultsBased on the methods extensively outlined in the previous chapter, trading data have been collected from FOREX platform for the time period of one month, from 1th May to 20th May 2019. The major currency pairs of GBP/USD is will be analyzed to determine the degree of reliability and success of the study approach. It is also expected that this analysis will give good information to investors and traders in the process of finding what time-frame and currency pairs show the bets result. In addition, how the tools and indicators provided by brokerage companies can persuade them to follow such treatment technical and fundamental analysis in their trading strategies.Fundamental analysis The 2019 GBP/USDForecast is highly dependent on the result of the Brexit deal going forward and with no fundamental bias, all options are still on the table leaving different GBP/USD scenarios all applicable.Among the important news from the UK, which may have an impact on the GBP/USD rate, it is worth mentioning: United Kingdom Manufacturing Production m/m, United Kingdom Gross Domestic Product (GDP) q/q.Sterling to US dollar rates has made advances at the beginning of May, 2019 following rumors that there has been progression in Brexit talks between Jeremy Corbyn and Theresa May. Talks between the Conservatives and the Labour party concerning Brexit appeared to be getting somewhere and this managed to provide the pound with a boost against a number of different currencies including vs the US dollar. Theresa May’s aim is to put together a mutually acceptable Brexit deal between the Tories and Labour so she can then get the deal through parliament.May has also stated it is a matter of urgency and that she would like to get a deal in place before the European elections on May 23rd. I am far from convinced she will make this happen. The Tories are unable to agree on an acceptable deal in their own party let alone one that is acceptable to both parties. May’s deal has failed on three occasions and at present remains unchanged.Although the threat of a hard Brexit may have diminished, bi-partisan negotiations between the government and the main opposition party have barely begun. As a result, ongoing political uncertainty raises the prospects of precautionary saving at the expense of spending, as well as the postponement in business investment, thereby impacting underlying growth potential. Should Brexit remain unresolved into H2, which appears increasingly probable, expect this to weigh on the probability of BoE action this year, in the process restraining GBP expectations relative to previous estimates. Despite this May persists, trying to gain concessions on the Irish border. Until we have firm news on Brexit the pound will remain fragile. It may be wise take advantage of current rates if you are buying US dollars.The UK GDP report is due 10 May, which is expected to decrease to 0.0% from the previous value of 0.2%. So, GBP is expected to display volatility and weakness if the expectations are met. Moreover, Manufacturing Production is expected to drop as well to 0.1% from the previous value of 0.9% and Prelim GDP is expected to expand to 0.5%.On the other hand, despite the positive employment change in the US, USD is struggling to maintain its gains over GBP. In the latest nonfarm payrolls, the unemployment rate report edged down to 3.6% which was expected to be unchanged at 3.8%, Non-Farm Employment Change was published with increase to 263k from the previous figure of 189k which was expected to decrease to 181k and Average Hourly Earnings report was published unchanged at 0.2% which was expected to increase to 0.3%.According to Fed officials, the US central bank may need to cut interest rates if consumer inflation is stuck low failing to reach the target level around 2%. The Federal Reserve's policymakers fear they are ill-equipped to battle the next recession under their current inflation-targeting approach. This year they are well into an effort to vet new strategies for managing interest rates under the conditions of muted inflation and low borrowing costs. To sum up, till the end of the May trend is going to be turbulent amid a series of macroeconomic reports from the UK which are expected to be rather weak. However, any positive reading which is unlikely, may reinforce bullish gains. On the contrary, USD has found support from positive reports recently can regain momentum over GBP again. So it is now the best time to buy US dollars in the last two months, as it appears as though US interest rates may not be going up as quickly as the markets had previously expected.Currency Forecast Outlook (compiled by the author based on the analysis of the currency pair GBP/USD)End of Period: Apr. 22/19 Q2 19 Q3 19GBP/USD 1.30 1.32 1.33Technical analysisCurrency pair GBP/USD continues to move in line with the decline, the pound to dollar rate is 1.305. Moving averages indicate an uptrend. At the moment, we should expect an attempt to grow and test the resistance area near the level of 1.3105. Where again we should expect a rebound and the continuation of the fall of the pound against the dollar. The target of the downward movement of the currency pair, in the framework of the FOREX forecast for the end of May, 2019, is the area at the level of 1.2835. See Chart 10In favor of the fall of the currency pair will test the downward trend line on the indicator of relative strength index (RSI). As well as the formation of the «Head and Shoulders» reversal pattern. CCI starts to go above 150, both MACD line are below zero (oversold). Hence, a strong signal has been sent to show the configuration of reversal pattern at the same time. Cancellation of the option to drop the pair Pound/Dollar will be a strong increase with the closing of quotations above the level of 1.3205. This will indicate a breakdown of the upper limit of the model and the continued growth of the Pound/Dollar pair to the area above the level of 1.3315. It is necessary to wait for confirmation of the pair’s fall with the breakdown of the support area and closing below 1.2945.Chart 10. GBP/USD chartSource: www.dailyfx.comGBP/USD Forecast for May, 2019 implies an attempt to test the resistance area near the level of 1.3105. Then the continuation of the fall with the goal below 1.2835. An additional signal in favor of reducing the British Pound will be a test of the trend line on the relative strength index (RSI). Cancellation of the fall option will be a strong growth and the breakdown of the 1.3205 area. This will indicate continued growth of the pair with a potential target above the level of 1.3315. However, GBP to USD Forex pair is a not so good long-term (1-year) investment.2019-04-13 2019-04-20 2019-04-27 2019-05-042019-05-11 2019-05-20Chart 11. GBP/USD Forecast, Short-Term Pound to Dollar Forex Rate Prediction for Next Days and Weeks (till 20 May, 2019)Chart 12. GBP/USD Forecast, Long-Term Rate Predictions for Next Months and Year: 2019, 2020Chart 13. Detailed Trend Components of the GBP/USD Forecast & PrognosisTable 3. GBPUSD Forex Rate Prediction (based on the analysis by author)DateOpening rateClosing rateMinimum rateMaximum rateChangeMay 1-20, 20191.314141.321681.314141.327040.57 % ▲Any resolution we get with the Brexit should be positive for the British pound, if for no other reason than to bring some certainty into the market. If and when we get that certainty, I fully anticipate that this market will go looking towards the 1.3450 level, and then try to break above the 1.35 handle. We could even break above there and continue to go as high as 1.42.Sterling stability and strength supported by the diminishing threat of a hard Brexit. Improved prospects of a managed Brexit process supports medium- and long-term stability and strengthening for sterling. I have adjusted GBP forecast somewhat to account for the fact that we no longer except a soft, but rather a hard version of Brexit, which the market has already somewhat priced in. The uncertainty in the near term will remain high. Since the GBP has been already hit a lot and is already broadly undervalued, we expect it recover in the near term. The BoE will also play a big role, as rising inflation makes them not willing to ease further - rather, warn of being “neutral” for now. That said, we retain a mildly stronger GBP in our forecast, which also reflects the big political uncertainties in the US and the euro area. However, we have a lot of work to do between now and then and I think it’s very likely that with the Brexit delayed the way it has been, we may get a fairly quiet month. If that’s going to be the case then I think the occasional headline will move the pair but that’s about it. I would anticipate a lot of support at the 1.29 level, and a lot of resistance at the 1.32 level. Short-term back and forth trading is probably going to be the mainstay of how we trade the GBP/USD pair, especially considering that seasonally we tend to see a lot of consolidation during this time of year anyway. Chart 14. GBP/USD chartSource: www.tradingview.comThe major purpose of the paper was to find out the reliability of technical and fundamental analysis in FOREX trading strategies and predicting the price actions for high fluctuations in this market. Usually the FOREX market is a very risky market, and trading without proper knowledge of the market behavior, correct forecasting and taking useful strategies will not lead into a reasonable and stable result. Thus, the object of this research was to measure the degree of success of technical and fundamental analysis in process of speculation by trading on the FOREX platform over a period of around one month.The study confirmed that technical analysis is an integral part of FOREX market because of its important rule for forecasting analysis and trading strategies. The study showed that without studying the past histories of prices and their applications in such analysis traders will be confused to correctly determine the direction of future trends. Our main goal is predicting the FOREX accurately, which we have successfully achieved by developing the most popular models. We were able to predict the model accurately at a fast pace which is the industry really aiming for. Our research, also provided the contribution of factors influencing the FOREX and also made us clear that any exploratory analysis is not always required for forecasting. As a future analysis, several other factors like political stability and finding how the political stability influences the FOREX rate. Also other factors like day today news both economic and political, Fuel price, any fundamental political speech can also be considered of how it influencing the FOREX rates.ConclusionDue to changes that occur in the way financial markets operate, behaviour of individual instruments is analyzed using not only information directly relating to a given value, but also relating to its environment. Exchange rates belong to the group of instruments that are highly responsive to environmental changes. Different factors, both economic and non-economic, cause changes in exchange rates. Identification of these factors and the analysis of their influence on exchange rates will often allow for using the acquired knowledge in the process of forecasting exchange rate changes. More and more national (regional) economies are becoming increasingly more open to international trade. The aim of this paper was to find the role of applying technical and fundamental analysis in trading strategies and forecasting in the FOREX market. As currency rates change at any time, forecasting the price and determining the correct trend has become a very difficult process for investors and traders, in addition to the high volatility dominates in the market. On the other hand, the more volatile market is associated with greater risk for speculators. This volatility may be caused by demand and the level of investors' supply for currencies, or it may be related to the impact of economic data, political news or some geographical issues. Making decisions to enter into the market at the right points and make a profit are the main goals of investors. One of the methods that help speculators find the logical points of transactions is to use the perspective of technical analysis in determining strategies for their speculation purposes. The thesis selected some of the main tools and indicators for running the technical analysis impact on forecasting and trading planning during the research period. These indicators were incorporated into reversal pattern model to identify the retracements of the currency pairs’ rates when the market faced an overbought or oversold situation. The technical method provides a quick profit. It includes the study of trading volumes and price movements, the analysis of price movements and graphs, the predicted behavior of stocks in the future based on trading models in the past. Among the shortcomings of the method is the absence of an perfect indicator for each instrument of the market, the presence of many technical indicators are distinguished. Today, at least half of all traders around the world use trading strategies based on certain principles of technical analysis. It is completely not necessary to know and use all existing indicators in trading, but it will be very useful to know at least a few of them to get a successful result. The empirical parts of the research provided the effects of technical and fundamental analysis through reversal pattern model by using several common indicators introduced by FOREX brokerage companies as described for a period of one month from 1th of May 2019 until 20th of May 2019. The currency pair applied for testing purpose was GBP/USD because of their high liquidity and importance in FOREX market.The ongoing globalization makes the turmoil in financial markets translate into the condition of markets all over the world. Globalization also reduces the possibility of supervision over the activities of financial institutions, increasing investment risk at the same time. Additionally, we are witnessing a specific feedback between financial markets. Therefore, building a model most accurately reflecting changes in the currency market is such a difficult and complicated task. The research suggests that technical and fundamental analysis are necessary methods for predicting the price movement (trend) in FOREX market due to the volatility and complexity that exist in the market. Since the most focus of this analysis is related to the price direction, it is safer to speculate using the technical method, as the price history repeats itself. Hence, price patterns such as candlesticks, reversal or continuation appear in charts quickly and assist to plan effective strategies in order to get the maximum profit. Although the study focused on technical and fundamental analysis in foreign exchange market, it also recommends that the market trend be accurately determined by combining both analysis. This research is expected to be useful for policy makers, investors, other players of FOREX market to help them minimize risk levels and make better decisions in their investment portfolios.ReferencesAdamska, A. (2004), The role and responsibilities of the CFO, Ed. OE, Cracow, p. 77-78Anderloni, L., Llewellyn, D.T., Schmidt, R.H. (2006), Financial Innovation in Retail and Corporate Banking, Edward Elgar, Cheltenham, pp. 138-141Batten, J., Mellor, R. and Wan, V. (1993), Foreign Exchange Risk Management Practices and Products used by Australian Firms, Journal of International Business Studies, Vol. 24, No. 3 (3rd Qtr.), Palgrave Macmillan Journals, pp. 557-573. Begg, D., Fischer, S., Dornbusch, R. (2007), Macroeconomics, Polish Economic Publishing House, p. 554.Błach, J. (2008), Financial Innovations and Their Role in the Modern Financial System – Identification and Systematization of the Problem, Financial Internet Quarterly „eFinance”, Vol. 7, No. 3. Bodnar, G.M., Gebhardt, G. (2010), Derivatives usage in risk management by German non – financial firms, Journal of International Financial Management & Accounting, Vol. 10, Issue 3, pp. 153-187. C˘arbureanu, M. (2011). The analysis of currency exchange rate evolution using a data mining technique., Petroleum-Gas University of Ploiesti Bulletin, Economic Sciences Series p.63. Candel, A., Parmar, V., LeDell, E. and Arora, A. (2015). Deep learning with h2o. Chandar, S. K., Sumathi, M. and Sivanandam, S. (2014). Neural network based forecasting of foreign currency exchange rates, International Journal on Computer Science and Engineering p. 202. Chen, A.-S. and Leung, M. T. (2004). Regression neural network for error correction in foreign exchange forecasting and trading, Computers & Operations Research p. 31. Chen, J. (2009). Essentials of Foreign Exchange Trading (Essentials Series), John Wiley & Sons, Inc., U.S.A. Czekalski, P., Niezabitowski, M. and Styblinski, R. (2015). Ann for forex forecasting and trading, Control Systems and Computer Science (CSCS), 2015 20th International Conference on, IEEE, pp. 322–328. Deng, J., Qu, Z., Zhu, Y., Muntean, G. M. and Wang, X. (2014). Towards efficient and scalable data mining using spark, Information and Communications Technologies (ICT 2014), 2014 International Conference on, pp. 1–6. Diebold, F., Hahn, J., Tay, A. (2006), Multivariate Density Forecast Evaluation and Calibration In Financial Risk Management: High-Frequency Returns on Foreign Exchange, The Review Economics and Statistics, Vol. 81, No. 4, pp. 661-673. Eng, M. H., Li, Y., Wang, Q.-G. and Lee, T. H. (2008). Forecast forex with ann using fundamental data, Information Management, Innovation Management and Industrial Engineering, 2008. ICIII’08. International Conference on, Vol. 1, IEEE, pp. 279–282. Freeman, J. A. and Skapura, D. M. (1992). Neural networks: Algorithms, applications and programming techniques, JOURNAL-OPERATIONAL RESEARCH SOCIETY,p. 43. Gan, W.-S. and Ng, K.-H. (1995). Multivariate forex forecasting using artificial neural networks, Neural Networks, 1995. Proceedings., IEEE International Conference on, Vol. 2, pp. 1018– 1022 vol.2. Gubler, Z.J. (2011), The Financial Innovation Process: Theory and Application, Delaware Journal of Corporate Law, Vol. 36. investopedia (2019). Forex tutorial: Economic theories, models, feeds data available.URL:http://www.investopedia.com/university/forexmarket/forex5.aspKamruzzaman, J. and Sarker, R. (2003). Comparing ann based models with arima for prediction of forex rates, Asor Bulletin 22(2): 2–11. Kayal, A. (2010). A neural networks filtering mechanism for foreign exchange trading signals, Intelligent Computing and Intelligent Systems (ICIS), 2010 IEEE International Conference on, Vol. 3, pp. 159–167. Kimata, J. D., Khan, M. and Paul, M. T. (2015). Forecasting exchange rate of solomon islands dollar against euro using artificial neural network, 2015 2nd Asia-Pacific World Congress on Computer Science and Engineering (APWC on CSE), IEEE, pp. 1–12. Leung, M. T., Chen, A.-S. and Daouk, H. (2000). Forecasting exchange rates using general regression neural networks, Computers & Operations Research 27(11): 1093–1110. Liaw, A. and Wiener, M. (2002). Classification and regression by randomforest, R news 2(3): pp. 18– 22. Lin, S.-Y., Chen, C.-H. and Lo, C.-C. (2013). Currency exchange rates prediction based on linear regression analysis using cloud computing system 6(2). Nelder, J. A. and Baker, R. J. (1972). Generalized linear models, Encyclopedia of statistical sciences. Patel, P. J., Patel, N. J. and Patel, A. R. (2014). Factors affecting currency exchange rate, economical formulas and prediction models, International Journal of Application or Innovation in Engineering & Management (IJAIEM). Retrieved from: http://www.ijaiem.org/volume3issue3/IJAIEM-2014-03-05-013. pdfSegal, M. R. (2004). Machine learning benchmarks and random forest regression,Center for Bioinformatics & Molecular Biostatistics Uddin, K. M. K., Quaosar, G. A. A. and Nandi, D. C. (2013). Factors affecting the fluctuation in exchange rate of the bangladesh: A co-integration approach, The International Journal of Social Science. Retrieved from: http://www. tijoss. com/TIJOSS% 2018th% 20Folder/1Kamal. pdf .Urrutia, J. D., Olfindo, M. L. T. and Tampis, R. (2015). Modelling and forecasting the exchange rate of the philippines: A time series analysis, AMERICAN RESEARCH THOUGHTS. Willmott, C. J. and Matsuura, K. (2005). Advantages of the mean absolute error (mae) over the root mean square error (rmse) in assessing average model performance, Climate research 30(1): 79–82. Wu, X., Zhu, X., Wu, G.-Q. and Ding, W. (2014). Data mining with big data, IEEE transactions on knowledge and data engineering 26(1): 97–107. Yao, J. and Tan, C. L. (2000). A case study on using neural networks to perform technical forecasting of forex, Neurocomputing 34(1): 79–98. Yu, L., Wang, S. and Lai, K. (2005). A novel nonlinear ensemble forecasting model incorporating {GLAR} and {ANN} for foreign exchange rates, Computers Operations Research 32(10): 2523 – 2541. Applications of Neural Networks. URL: http://www.sciencedirect.com/science/article/pii/S030505480400156XZhang, G. (2003). Time series forecasting using a hybrid {ARIMA} and neural network model, Neurocomputing 50: 159 – 175. https://forex24.pro/gbpusd-chart/http://www.forexeconomiccalendar.com/forex-trading-hours.htm https://walletinvestor.com/forex-forecast/gbp-usd-predictionhttps://www.fxstreet.com/analysis/gbp-usd-2019-forecast-imprisoned-by-brexit-darkness-sterling-is-set-to-chart-a-check-mark-201812210948