Currency Secrets

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).

Indicative prices reflect a price of market consensus from various data brokers and dealers. The price could reflect either the median (the quantity of brokers/dealers that represent the most common
price), the average price, or all prices (regardless of bid or ask).

Indicative prices visually can be seen as very “noisy” as compared to other price formats. If you were to look at a candlestick chart that displayed indicative history you would notice that the candlestick bodies would be smaller while the wicks from both ends would be longer as compared to other “normal” charts.

What are the problems associated with indicative data?

The primary problem associated with indicative data is that it does not accurately represent the actual history of the forex market from your forex broker.

This is important.

If you were to design a system that relied on stop and limit orders you would want to know if your forex broker would have execute your order at those prices. If the data you test on does not reflect what you forex broker would have quoted then the results you receive will be worthless – as some (or all) of your trades would not have been transacted in real life anyway!

I personally have tested a forex system using indicative data, and when I went to trade the forex system using live intraday indicative data I found that when I compared my ACTUAL trading results to the indicative data backtested results they were completely different.

What should I do if I have indicative data?

I know for myself personally that it was a waste of money. You can try and ask for a refund, but I wouldn’t get any hopes on seeing anything back. The best thing to do would be to do as I did – just move on and throw it in the bin and warn as many other budding forex traders about the dangers of such useless data.

The only real benefit (if you can call it that) is indicative pricing is cheap – so you’ve probably only lost a small amount of capital.

What is a better alternative?

We all know that it’s important to test our system on some forex history, it just comes down to what type of forex history. Besides indicative prices we have bid, ask and mid-prices… so what do we choose from?

To be honest, either of the three doesn’t matter. They all represent the same thing just in a slightly different manner.

The bid price would obviously represent the bid price of the broker at that point in time, likewise the ask price (it would represent the asking price of that currency pair at that point in time). The mid price represents the middle price of both the bid and ask prices. All you’d need do is find out your broker’s spread for the currency you’re testing and you’ll have a rough representation of what the bid and ask price of that currency would have been at that point in time.

As a quick example: If I had the bid price of the EURUSD at 1100 EST on 1 April 2004 as 1.2432, and my broker has a 4 pip spread on the EURUSD cross then I’ll know that if my system were to buy the currency at that same point in time it would hit the asking price of 1.2432 + 4 pips = 1.2436.

Easy huh!

Conversely, if I had the ask price of the EURUSD at 1.2445 then I know that if my system were to sell (or go short) at that same point in time then I would know that the bid price would be 1.2445 – 4 pips = 1.2441.

Lastly, if I had the mid price of the EURUSD at 1.2452 then I know what the bid and ask prices would represent. The bid price would be 2 pips lower at 1.2450, and the ask price would be 2 pips higher 1.2454.

It therefore is a matter of preference on what you choose. I personally prefer bid prices, but that’s mainly due to the fact that I can wrap my head around it much quicker and easier. Some forex traders that I know seem to prefer the mid prices as they can easily incorporate the spread into their performance. (To understand more about this topic head over to 5 Things You Need To Know BEFORE Back-Testing Your Forex System).

I hope this article has been beneficial in showing you the importance of why all forex historical data is not created equal!

If you do wish to use indicative prices be very cautious with the results and double your slippage settings (at least).