Do you know what Alan Greenspan thinks about currency forecasts?

Alan Greenspan on Forex Forecasts

Have you ever wondered if currency forecasts really work? If you are basing your trading on forecasts, are they feasible? Should I trade base only on currency forecasts or should I add other types of analysis? There are the questions that I try to answer in this article.

You already know who Alan Greenspan is right? Just in case you don’t, he was the President of the Federal Reserve (US Central Bank) from 1987 to 2006, almost 20 years! So this guy knows what he is talking about. Three or four years ago we wrote the book “The Age of Turbulence”, where you can see how good he is when it comes to forecasting (he is probably the best one in the world).

He shares a story about his early days as a forecaster: once, the government asked him to do a forecast for the demand of steel by the military industry, of course, they wouldn’t give him any information about it, it was classified information. Anyway, he started to work with the data he could collect, and handed the results. And a few days later, guess who called him? The Government, asking him how he got to that conclusion, they were impressed by the accuracy of his forecasts...

Anyway, there is another passage on his book, where he talks about currency forecasts, he says:

    "... I knew that because of the efficiency of Foreign Exchange (Forex) markets, forecasting exchange rates for major currencies is as accurate as forecasting the outcome of the flip of a coin."

What do you think? What do you think he is saying here? Think about it, and we talk about it later on this article...

There are plenty of forecasting tools that we (Forex traders) can use to determine the direction of the Forex market:

    Fibonacci
    Elliot Waves
    Gann
    Planetary cycles
    Pet behavior :)

Most traders like to think they can be used as forecasting tools (without using more tools), but are they really?

I don’t think so. For me, it’s difficult to say that the market is going to retrace back just because it has reached the 38%, 50% or 62% retracement of the previous move (Fibonacci), it’s difficult to say that the market is going to continue its way up, until it reaches the projection 1.618 from the previous wave (Elliot Waves), it’s difficult to say that the market is going to change direction because time and space have reached a vortex (Gann), it’s difficult to say that they market has topped because Mars is closer to the Earth (Planetary Cycles). Your pet behavior could be more accurate than the mentioned tools, but I don’t recommend you to use it either :)

I have to say, I agree with Alan Greenspan, I find it very difficult to trust “forecasted” levels, gotten by applying a mathematical formula to the price values (be it the last move, the last wave length, etc). I think there are other way to forecast accurately the Forex and all other markets.

Then why are these tools are widely used?

Because we all need an explanation of everything, we need a reason, what happened here, what happened there. That’s the way we (ALL) are wired, it’s human nature. It will be enough to see the financial news, you’ll see that they could even give the same reason to bullishness and bearishness... You’ll see: the market went down because investors took profits, because of the world economy, it went up because there is still confidence, it went up because the information was discounted before the actual announcement. We just need to know the “why”. But isn’t it more important to know: what the market is likely to do than why it happened?

Forecasting tools are still useful

All forecasting tools such as Fibonacci, Elliot Waves, etc are still useful, but not as a single formula to determine what the market will do in the future. You need to combine them with tools of other nature, such as indicators, chart patterns, price action, etc. If you get the same condition using both tools, then you are more likely to get better results. Alright?

If it not feasible to forecast the Forex market using these tools, what is left for us?
The answer in just one word: ADAPT!

Exactly, I think the best way to trade the Forex (and any other market) is to adapt to the market conditions. Wait for the market to make its first move, then you act based on what the market is doing. Just wait for the market to tell you which way it is heading, then you trade based on these conditions, based on what the market is ACTUALLY telling you.

Don’t try to guess using just one forecasting tool, add something else (not too many though, or you’ll end up with a system that will give you no signals at all). But you need to be as objective as possible, base your trades on objective data, such as:

    the market was rejected from this level before
    it is trading at historical lows/highs
    it formed a double top
    price action is yelling at me to go short, etc.

It is as simple as these three conditions:

    What are you going to do if the market gets rejected from an important support level and it is going up? Look for long opportunities
    What if it got rejected from an important resistance level? Look for short opportunities
    What is the market has no clear direction? Don’t trade it! Focus on other pairs or crosses that have a clearer market condition!

What to you think?