OVERVIEW
Every Forex trade involves the simultaneous buying of one currency and the selling of
another currency. These two currencies are always referred to as the currency pair.
The base currency is the first currency in the pair and the second currency in the pair is called the quote currency. The exchange ratedefines how much the base currency is worth in terms of the quote currency.
A common practice in the trade is to describe currency pairs as major currencies,
minor currencies or cross rates. Cross rates are those currency pairs in which neither currency is the U.S. Dollar (USD). In major and minor currencies either the base currency or the quote currency is the USD.
Minor currencies are defined as those currency pairs with low trading activity, while
the major currencies are those currency pairs with the highest trading volume. Different currency brokers list different pairs as being major or minor. On the average, major currencies carry a slightly lower transaction cost due to their high liquidity. We arbitrarily define the major pairs as the U.S. Dollar versus the Euro currency, the British Pound, the Swiss Franc, and the Japanese Yen.
A pip is the smallest unit of price that any currency pair can fluctuate. Nearly all
currency pairs consist of five significant digits, and most pairs have the decimal point immediately after the leftmost digit; for example, EURUSD is displayed as 1.2329. In this instance, a single pip equals the smallest change in the fourth digit to the right of the decimal point, that is, 0.0001. Therefore, if the quote currency in any pair is the USD, then one pip equals 1/100 of a U.S. cent.
Just as a pip is the smallest price movement along the y-axis, a tick is the smallest
unit of time (x-axis) that occurs between two trades. When trading the most active currency pairs during peak trading periods, multiple ticks may and will occur within the span of a single second. In fact, over 300 ticks per second are not unusual in the EURUSD during high-activity periods. When trading minor currencies during low-
volatility periods, the trader should be aware that a single tick may not occur but
every two or three hours.
STREAMING DATA
In order to compile an analytical study of this depth, it was necessary to acquire
massive amounts of raw historical quotes. To this extent, we wish to express our ap-
preciation to Disk Trading, Ltd. (www.disktrading.com) for its extensive and well-
organized archive of historical currency prices (both spot and futures) dating back to the early 1970s.
Forex data can be packaged either as streaming data or as interval data. Streaming
data consists of every single price change as it occurs regardless of the time elapsed between ticks. This creates voluminous amounts of data. For example, all the tick quotes for the EURUSD currency pair from January 1, 2005, to December 31, 2005, provide the statistical sample for numerous analyses in this book with a sample size of 7,974,098 prices.
Streaming data uses the following comma-delimited field conventions for tick data:
Date,Time,Close
01/01/2002,0116,0.8896
01/01/2002,0116,0.8895
01/01/2002,0116,0.8897
01/01/2002,0116,0.8893
01/01/2002,0126,0.8902
GETTING STARTED
FIGURE 1.1Pip-Tick Relationship
Data is shipped on compact disks and DVDs since the sheer volume of data is too
large to download at current modem speeds. CSV (Comma separated values) files must
be unzipped and then read as flat ASCII files.
INTERVAL DATA
Interval data, in contrast, is compiled from the streaming data by coercing the data into the standard open, high, low, and close (OHLC) format for equal-interval time periods.
Disk Trading, Ltd., packages this type of data as 1-minute, 5-minute, 10-minute, 30-
minute, hourly, and daily data.
Interval data is stored in the following convention (5-minute interval example):
Date,Time,O,H,L,C,U,D
4/20/1998,0920,1.0982,1.0982,1.0982,1.0982,2,0
4/20/1998,0925,1.0980,1.0983,1.0980,1.0983,3,1
4/20/1998,0930,1.0985,1.0990,1.0982,1.0989,8,3
4/20/1998,0935,1.0987,1.0993,1.0987,1.0988,2,3
4/20/1998,0940,1.0987,1.0989,1.0983,1.0985,4,3
Dates are always expressed using the standard convention MM/DD/YYYY, while
the time field uses a four-digit integer to represent the 24-hour convention (i.e., 2030 =
8:30 P.M.).
Due to the lack of centralization, Forex currency data does not have volume and
open interest fields as in commodity futures quotes. The last two fields above (“U” and
“D”) are upticks and downticks. These two fields will be used to calculate two indica-
tors specific to currency trading, the Activity Oscillator and the Direction Oscillator.
Activity is calculated as the sum of the upticks and downticks over a specified period.
Direction is the difference between upticks and downticks over a specified period.
No comments:
Post a Comment