Is Indicative Data Really *That* Bad?
The short answer: it depends on which time frame you’re using.
As you may or may not know indicative data is the sum (or average) of a currency price from different sources around the world. As an example, if there are only two forex brokers in existence and they all quoted the same price for a currency pair then the indicative data will reflect that price, if all the brokers quoted different figures then the indicative data will find what the middle (or average) figure is and quote that figure.
Now this is where the initial problem of indicative data lies: it is obtained from different sources.
If you are multi-talented and can manage several hundred forex platform connections then maybe you could make indicative data work… as there’s bound to be at least ONE forex broker that would have the figure quoted by your indicative data service provider! But unfortunately this is just too unrealistic for most people.
So, if we open up an account with a forex broker we want to be able to test our ideas on what our forex broker quoted in the past. Makes sense doesn’t it?
In essence we’re answering: how much would I have made with my forex broker with this system? And the only way we can answer this question is by obtaining some forex history, writing our system into computer code and testing it on a backtesting platform (such as Wealth-Lab).
But as indicative data reflects average prices from other forex sources we’re going to be testing our system on data that could very well be out from our forex broker’s data prices by as much 5-20 pips.
Hence the danger of using indicative data when testing it on intraday data – the 5-20 pips error zone can take up the majority of an intraday bar!
But what about testing on end of day data?
If indicative data is 5-20 pips out on average then on a daily scale would you think this error zone would take up a large portion of the day’s bar?
Probably not, and this is why I find it acceptable to use indicative data on these larger time scales.
Of course we could still be out 5-20 pips, but due to the fact that currencies can move 100-200 pips in a day the excess 5-20 pip move made by indicative data wouldn’t cause too much of a problem.
So, on higher time frames such as the daily, weekly and monthly charts I personally believe that indicative data is OK for testing your end of day forex system on. When you start moving into intraday data I personally would disregard indicative data accordingly – the margin of error is just too high relative to the distance of the intraday bar (but small in comparison to daily, weekly bars).
June 10th, 2005 at 3:04 am
Hi,
is there general consensus on the definition
“indicative data reflects average prices from other forex sources” ?
My initial conclusion from the below observation is that indicative data deliberately mixes bid and ask.
One of my standard tests on historical data is to plot,for a given timeframe, the data
high – open and low – open. With data from some data sources, you will see that the high is *always* higher than the open and the low is *always* lower than the open. This is clearly not realistic but will give fantastic results for some trading systems.
Best,
bmalp
June 10th, 2005 at 9:00 pm
Hi bmalp!
I don’t know if there is an official statement made by any one indicative data provider about how they obtain their data, however the observation can easily be made when one compares indicative data between a live feed given by a forex broker (any forex broker that has a charting plugin on their platform).
I concur that indicative data does exhibit bars that have higher highs than say normal bid prices – and this would be due to the fact that indicative data derives its data from ask prices too.
However, one needs to be careful with making this assumption as indicative data is pooled from many different sources and I know from my own personal experience that not all forex brokers quote the same bid prices.
Therefore, as to exactly what is quoted on indicative data is anyone’s guess.
There’s those who believe it is BOTH bid and ask data and others who believe it’s the mid price.
My concluding opinion though… it’s data that shouldn’t be used to test any intraday system.
Ryan
July 14th, 2005 at 12:56 am
[...] on smaller time scales (the 5-10 error band is just too large). You can read more about it here. 5. Are you going to include the spread, comm [...]
October 18th, 2006 at 7:24 pm
The indicative/”real” quote data debate is an interesting one but after doing a bit of research, I came to the following conclusion.
From my understanding, all retails brokers are in fact, mini-marketmakers between their own clients and and their clearing banks, unless you’re using an ECN broker (i.e. a “big-boys” broker where you have a number of quotes from the various banks, hedge funds etc for each currency pair). This basically means that each Forex broker’s quotes are their own, and therefore different from another broker’s quotes, depending on what their clients are up to. This can be seen by downloading several demo platforms. Try for instance, downloading Saxobank’s client and FXDD’s client – their hourly quotes normally vary around 5-10 pips but can vary by as much as 40 pips! Even the guys who claim to not have Dealing Desks, still make the market but often through an associated or sister company (so they can keep their claim to not have a Dealing Desk).
What all this boils down to is that if you wanted “real” market data, rather than indicative data, you would have to get that data from the broker you happen to be using at that time, as he is the one who is “making your market” at that time. Personally, I would find it a bit risky to only use data from only one specific broker as, should he decide to change the matching conditions etc for whatever reason (for instance, a lot of brokers are doing this now in response to all the news traders), that “edge” that you thought you had could quite quickly disappear!
With this in mind, I’m actually quite open to using indicative data. I figure that if I develop a trading system using indicative data and then test it’s validity on data provided by several brokers, it should be a reasonably good trading system. If a trading system will work well with data provided by one broker and not with the indicative data, then I wouldn’t use that trading system….