Forecasts & Stop Losses

I wanted to raise a slightly more light hearted topic in this article. Whilst you will hear us often comment at Littlefish that the big problem with the majority of retail traders is that they get their forecasts and trades wrong, today I want to demonstrate to you something that should lift your spirits a bit if you are still in the camp of getting it wrong.

SO DO BANK ANALYSTS.

One of the great features of the Thompsn-Reuters Eikon platform is that it has a really great tool on it called FX Forecaster Chart where essentially you can select a currency and select from a list of Bank’s and it will plot on the price chart of selected currency, the anticipated future path of the currency as forecasted by each Bank.

Great, so we know where the Banks think EURUSD is going to head over the next month, or quarter, all we have to do is follow their call right? Well not necessarily, first off we usually see a decent range in the anticipated forecasts and so it isn’t as simple as following one call – unless of course you pick one Bank to follow (some do seem to get it right more than others) or you could take the mean call.

Lets see.

At the beginning of Q2 in April we saw a number of Bank’s making a variety of calls about where EURUSD would end Q2. For example HSBC called EURUSD to end Q2 at 1.01 and RBS slightly higher at 1.06.  With 2 weeks left to go we’re currently sitting at 1.12, about 1000 pips above where HSBC forecast us to end in 2 weeks.

Below are their latest forecasts.

forecast

So let me just briefly explain this really interesting chart for you.

The price line is EURUSD current. The purple dotted line is HSBC’s forecast. The pink line is Barclays’ forecast, the green line is RBS’ forecast, the grey line is Deutsche Bank’s forecast and the red line is Goldman Sachs’ forecast.

The yellowish line is the mean (of all forecasts not just ones shown) and the light blue line is the smart estimate (a clever average).

So, what is this showing us? Well, that all those Banks forecast Q2 to end significantly below current market levels.  We can also see that HSBC and RBS both revised their forecasts mid Quarter with RBS looking for 1.02 and HSBC looking for 1.04.

It isn’t looking particularly convincing right now that any of them are going to be right!  These guys are the leading industry experts and  look how wrong they are.

The important take away from this article I hope, is that despite what the “experts” are calling for, they key thing is to stick to a strategy that you know works, and trade your system following your rules not being influenced by vague “forecasts”.  Simple systems built around trendlines, support and resistances, pivots, price action  and a little bit of fundamental knowledge stand a far better chance than if you try to follow forecasts, which don’t account for the important stuff like stop losses. All they actually give you is a vague profit target.

Another thing to remember is just how sensitive forecasts can be to real-time events. USD news has the potential to seriously skew EURUSD at any major release and EUR news offers a second catalyst for sharp reversals in direction.

So stick to your trading and leave the “forecasting” to the experts!

 

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