Courses on Forex – The forex climate

Courses on forex – the forex climate

This article will examine a trading tool used by Courses on forex – the forex climate. We will look at what the forex climate is, how it works, where to get it and how useful it is. The good news is that this is a free tool that does not require any installation.

The forex climate looks at the strength and weakness of individual currencies within the most traded currency pairs. People following my trading will know that I personally only trade the GBPUSD pair. Therefore, all of my examples, images, calculations and conclusions relate to this pair only.

The forex climate screen shows candlesticks and chart lines. Each of the chart lines represents the strength and weakness of one single currency. Using movement of the currency lines relative to each other the forex climate attempts to predict how the currency pair is going to move going forward.

The forex climate has uses three time periods, each on a different screen. These are 1 hour, 4 hours and 1 day.

So let’s have a look at the 1 hour screen for the GBPUSD pair where each candlestick represents 1 hour:

screen shot of forex climate 1 hour chart

Forex Climate 1 hour chart

 

 

 

 

 

 

 

 

 

On the left of the screen shot the GBPUSD pair title is highlighted to show which currency pair screen we are looking at. Other pairs and even all pairs can be accessed from this these tabs. At the top of the screen the “H1” tab is darkened showing that we are looking at the 1 hour screen and not the 4 hour or 1 day screen which can be accessed via the other two tabs.

The main screen area is divided into two areas. The upper area shows candlesticks, which everyone should be familiar with, and a green upward pointing arrow and red downward pointing arrow. Notice that the arrows coincide with crossovers of the two lines in the bottom area of the screen.

The bottom area of the main part of the screen shows two chart lines. The green line relates to the individual strength of the USD and the white line represents the strength of the GBP.

When this screen shot was taken the last arrow to occur was a downward pointing red arrow indicating that we are in a period during which this screen continues to predict a downward movement in the GBPUSD currency pair price.

The basic idea

The basic idea behind the tool is that an upward pointing green arrow predicts a rise in the currency pair price and a downward pointing red arrow predicts a fall in the currency pair price.

The strength of the prediction increases if the 4 hour screen predicts the same price direction as the 1 hour screen and it is a stronger prediction again if the 1 day screen prediction also lines up with the 1 and 4 hour screen predictions.

The tool also claims that the movement of the individual currency charts relative to each other is important. For example; converging line foretell a new crossover an therefore a new arrow, diverging lines suggest a continuation of the current prediction.

A zero line penetration – when a currency moves from below the zero line to above the zero line it is suggested is getting stronger and further strength should be anticipated. Crossing from above the zero line to below the zero line indicates the currency is weakening and further weakness should be anticipated

Scissors – When a currency that is well above the zero line starts to decline back toward the zero line and a currency that is well below the zero line starts to go back up toward the zero line, the currency pair indicated is likely making a strong directional countermove

Here is a screen shot of the 4 hour screen taken shortly after the 1 hour screen shot;

4 hour forex climate small

Forex Climate 4 hour chart

The 1 hour tab shows a downward pointing red arrow as the last occurring and lines that both lines are moving upwards rather than converging or diverging.

The 4 hour chart shows a green upward pointing arrow as the last occurring arrow and lines thatmay be converging.Here is the 1 day forex climate screen:

The last occurring arrow on the 1 day screen is also a downward pointing red arrow, even though it occurred at around 70 days ago. Although the lines are close they look to be parallel rather than diverging or converging.

How is the forex climate screen formed?

Unfortunately, I don’t know! I contacted one of the partners who publish the forex climate and politely asked how the individual strength and weaknesses of currencies is calculated and charted. I was very politely told that this is a secret – so who knows!

Does the forex climate tool work?

Far more important than where it comes from, to me anyway is whether it actually works! The forex climate often looks and feels as though it works. However, I decided to do some testing.

Probably the most common use of the forex climate tool is to look for correlations between the different time period screens.

I looked at a period from 14th November 2012 up to the 12th of April 2013 a period of 106 trading days. This was as far back as I could get data for, again after having requested but having being refused more data from the Forex Climate people.

The data was recorded on a spreadsheet as shown below:

forex climate spreadsheet picture

Click on image to enlarge

 

For each date I recorded the colour and direction of the prevailing arrow for each of the 1 hour, 4 hour and daily charts as shown. This did give me a bit of a problem, particularly in respect of the 1 hour charts. Where an arrow occurred part way through a day I had to decide whether to record it as an upward or downward pointing arrow. As I was using the arrows to predict the following day’s price direction I decided to use the directional arrow prevailing at the end of each day.

The red letter R’s and green letter G’s indicate whether the price (candlestick) for the full day associated with the date shown was downward (red candlestick) or upwards (green candlestick).

Predictions

Because I am trying to use the arrows to predict the following day’s price direction we need to look at whether a red or green candlestick occurred on the day after each set of arrows.

Outcomes

Firstly I looked solely at the 1 hour arrow that was in place at the end of each day. There were 106 days to look at. I found that the arrows predicted the following day’s movement on only 50 of the days giving a 47.17% success rate – a guess could have done just as well!

I then looked at the 4 hour and 1 day charts as predictors and found the success rate to be successively 45.28% and 42.45% respectively – not good, in fact even worse!

Almost is desperation I lifted the bar. I checked out how many days had occurred which had both the 1 hour and 4 hour screens giving the same prediction of directional movement. There were 68 such days and on 34 of them the following day had a colour of candlestick as predicted. This at 50% was my best result.

Undeterred, I checked out days on which only the 4 hour and 1 day screens both predicted the same price direction. There were 59 such days and 25 of them of 42.37% were predicted correctly.

Finally, I checked out the 42 days on which all three screens were giving the same prediction. Unfortunately, only 19 or 45.24% of these predictions turned out to be correct.

Conclusion

The forex climate’s price direction arrows are not an effective predictor of the following day’s direction of price movement as far as the GBPUSD currency pair is concerned. A guess with a 50:50 chance of success would be a better predictor.

All is not lost, going forward I intend to record what is happening to the individual price charts at the end of each day to see if they can give a better prediction. I will also look at the situation for each trading day from each morning for the remainder of the day. Perhaps like a weather forecast the nearer in time the forecast is for then the better the forecast.

Find the forex Climate

The forex climate is currently free to use and can be found at www.forexclimate.com

 

About The Author

Jeff Fitzpatrick

Probably the UK's most successful home Forex trader