Jennifer Gorton from Forex Traders
Jennifer Gorton is the content manager of Forex Traders - a learning portal filled with daily Forex news.
In this article Jenny talks about the importance of quality end-of-day data when trading Forex.

FOREX TRADING WITH END-OF-DAY DATA

       

The use of historical end-of-day market data is a prerequisite for technical analysis in nearly every investment activity where active trading is the name of the game. Real estate and collectibles, less active markets for sure, may not depend on this type of timely data, but trading in stocks, commodities and foreign exchange cannot exist without it. The requirements in the forex market are further constrained by the fact that the market is not centralized. Investors must rely on the limited market data provided by their forex brokers or attempt to find companies that specialize in supplying quality data that have been filtered and checked before release.

There are a limited number of companies that provide these data bases and can fulfill the needs of professional forex traders that use files such as these to back-test their various trading strategies. Traders are reluctant to use forex trading demo accounts for this purpose since the range is limited to current situations and repetitive iterations are precluded. The primary objective is to have a large file covering extended time periods, thereby offering a random set of differing real-time situations to fine-tune the signals that are created by their trading system.

Since the foreign exchange market is not centralized, a data collector must approach brokers and banks to access actual transactional data. A reasonable number of sources are required to ensure the integrity of the data and satisfy statistical sampling guidelines. Occasionally this process will produce gaps that must be filled at a later time in order to produce a valid testing database.

Once armed with a high-quality set of data, back-testing can begin. Professional traders swear by their experiences with back-testing, whether by performing manual runs or by using automated software designed for the purpose. Perhaps, the greatest benefit is the confidence that comes from understanding data formats at a granular level, the tendencies of market to react under certain conditions, and how their own personal strategies behave under previous market trends.

The entire field of technical analysis could not exist without historical end-of-day data. From basic charts, to candlestick formations, and to the very workings of technical indicators, calculations are based on how prices change over time. Aided by today's advanced computing power, designers have developed thousands of technical indicators to perfect the art of predicting future price movements based on historical data.

A major case in point is the field of momentum oscillators. These indicators are designed to measure the rate of price change, not the actual price level. Momentum is calculated by taking the difference between the end-of-period price for the current trading period less the end-of-period price for the previous period. The values obtained may be either positive or negative and are generally plotted around a zero line.

One of the most popular momentum oscillators ever invented is the Relative Strength Index (RSI). The RSI uses a more complex series of calculations to measure the relative changes between higher and lower closing prices over a selected number of trading periods. The results at the higher or lower part of the scale are then used to indicate overbought and oversold conditions, respectively, in the market. These signals assist the trader in determining the optimum times to enter and exit the highly volatile forex market.

We live in an advanced information age. Mountains of data exist, and for those that have the ability to analyze and discern patterns in the data, they can generally leverage this "edge" to their advantage in the form of monetary gain. Data is abundant, but information is real power.

First Published: 26 October 2010 - Copyright © Forex Traders

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