Shares digital

What’s in a number? Quite a lot, actually. Marilyn McDonald explains the how statistics can help with your forex strategy

There are stats available that will quickly tell you which currency pairs have the greatest pip movements, which day of the week has the biggest pip movement, and which hour of the day provides the biggest pip movement. By evaluating the stats behind currency trading it is possible to make decisions about when and what to trade. Let’s take a closer look some additional stats in an effort to determine how to trade – please remember , however, that these are not fool-proof stats.

So, let’s say you are sitting at home trading the GBP-CHF and you would like to know how long to hold a trade. It would be pretty amazing to know how many bullish candles you are likely to see form before you will get a bearish candle, right? Well you can. Consecutive bullish bars (see figure 1, right) will tell you how many bars have a higher close and may give you some insight into the likelihood for follow-through after the price moves higher. In our case, you can see that the GBP-CHF has an average of two bullish candles before you will see a bearish candle. You can also see that the minimum is one (of course) and the maximum probable number of bullish candles in a row over the last six months is just under three. So, if you are sitting on a run of three bullish candles and you had this information in your arsenal, what do you think I would tell you to do? Close? You would be exactly right.

Number of bullish bars doesn’t really give you all the information you need to know in this case does it? If you are like me you are probably wondering what the average pip movement of the GBP-CHF bullish bar is. This information would allow you to start figuring out not just what you would like to be able to take out of the market, but also at which stage you should be closing that trade.

It would also be beneficial to know the average bullish movement of those consecutive bullish bars. Now, you can see that your bullish moves on the GBP-CHF have been averaging about 290ish pips per movement. Don’t try to capture all 290 pips. You need to realize you can never buy the lows and sell the highs. It is just not going to happen. Take a portion of it and be happy with it. If you happen to take 200 pips out of a 290 pip move you need to congratulate yourself on a terrific trade rather than sulk about the missed 90 pips.

I can see your eyes drifting over to that GBP-JPY. I will reiterate my warning about the high volatility pairs, these pairs will whipsaw wildly and are more than happy to take your money with them. Trade these volatile pairs with extreme caution.

We have covered the bullish moves but one of the fantastic aspects of the currency market is the ability to go short as well as long, so I want to take a brief look at the stats behind the bearish candles as well. As you can see from the diagram (see figure 2, right), the average number of consecutive bearish bars is about two. The area of high probably runs from one to almost four. That alone should tell you something. The number of bullish bars tends to be less than the number of bearish bars on average for the last six months or in other words, the GBP-CHF has been in a decline on average for the last six months. But exactly how much is your average bullish run? Let’s refer to the numbers.

As you can see by the data over the last six months, the average movement of the consecutive bearish bars is right about 350 pips with the probable range somewhere between 50 pips and just over 600 – substantially more than the bullish runs we looked at earlier.

I don’t know about you but I can immediately see the benefit of having this sort of information at my finger tips when I am putting together a forex trading plan. One of the keys to staying afloat in this volatile, yet potentially lucrative market, is to learn as much as you can. I would recommend watching the stats behind your chosen currency pair on a regular basis. This information will change over time so remember to keep that finger tip on the pulse of the world’s largest market.