Why Predictions Don't Mean Much

01/09/2014 9:00 am EST

Focus: FOREX

While they make for interesting reading, predictions about market behavior for a long time period do not necessarily translate into profitable trades, says Mike Kulej of FXMadness.com.

I trust everybody had a great New Year’s Eve and is ready to get back to work. By the look of the first couple of days, currencies are subject of some heavy buying/selling, as if market participants meant serious business. Perhaps it comes on the heels of myriad of predictions about what currencies will do in 2014. After all, seems like everybody has an educated opinion on the subject, expressed in countless articles and interviews. So, should we pay much attention to these voices?

In short, probably not. Predictions about markets behavior during as long of a time period as a year do not necessary translate into profitable trades. While they make for interesting reading, these views are relatively vague and not offer specific parameters, such as timing and stop loss levels, except for the eventual objective. That is perhaps good enough for somebody who treats currencies as if they were mutual funds. However, very few market participants take this approach, since majority of traders prefer to be more active.

For example, I read that the Australian dollar will rebound to parity with the USD. Is it possible? Of course, but when would this happen? Does it mean the AUD/USD will rally straight up to this objective in the next couple of months, or will it dip below 0.80 before a strong advance later in the year? Price behavior like this could easily stop out many trades yet still confirm the prediction. Too ambiguous and not practical. It is better to trade the charts we are comfortable with, taking every position on its own merit. If they line up with forecasts for the year, great, but that should not be our primary motivation. The goal is to bank some pips, regardless of long-term predictions.

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Back in December, I was looking for a correction in the GBP/JPY. While it produced two good trades, the price continued to rally making a new high at the 175 handle. Recent pullback to 171.03 could be a sign of weakness, but we need to see more confirmation. For me this means moving under Friday’s low. I have a sell order at 170.90, targeting about 300 pips. If this trade develops, it could take some time to conclude, given the intermediate-time frame.

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Another currency pair of interest now is the AUD/CAD. It has been falling for some time, shedding about 600 pips from the parity level. Several attempts to reverse stalled at the 100 SMA. We have a similar situation now, with the AUD/CAD making new minor high at 0.9575. For the reversal to happen, the price must move through this resistance. Such action would increase probability if reversal, in which case I would like to go long. My buy order is waiting at 0.9585, with objective of 100 pips. Have a great trading week (and month and year)!

By Mike Kulej of FXMadness.com

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