Data analysis is important in day trading and investment. In most cases, successful traders rely on in-depth analysis of data to predict what will happen in the future.
To do this, they rely on Historical data and other tools Like technical indicators. In this article, we’ll look at what this look back on data is and how to use it in day trading.
Companies in the financial industry such as brokers and cryptocurrency exchanges deal with data all the time. that they Record and store key financial asset data such as stocks, currencies and commodities.
Once collected, this information becomes historical data. This explains why you can easily learn how to trade the Dow Jones 30s.
There are several types of historical data in trading. First, there daily datawhich indicates the data that occurs in a particular market session.
Second, we can look at DailyAnd weeklyor monthly data. These are the numbers that occur in a particular period.
Third, data can be aggregated by assets. The most common assets in the financial market are stocks, commodities, exchange-traded funds (ETFs), and forex.
Moreover, there is historical data related to economic data. Some of these numbers include data on inflation, manufacturing, jobs, and industrial production.
Another type of data is in play profits. It indicates how a company publishes its financial statements every quarter. You can use these numbers to determine the direction of the company’s performance.
Traders and investors rely on historical data for several reasons. First, they can use this data to Learn the direction of the assets. A good example of this is shown in the chart below. As we can see, the stock rose to around $40 in 2021 and then started moving in a downward trend and moved below $5.
Therefore, a trader can easily know that Bakkt is not a good investment. Without this historical data, it’s almost impossible to know if it’s a good buy or not.
Secondly, historical data is useful for Create financial models. Most traders and investors rely on different financial models that look at different things. In most cases, these models are based on historical data.
Third, this data is used Create technical indicators Such as Moving Averages, Relative Strength Index (RSI), MACD, and Stochastic Oscillator. Without this information, trading would be a very difficult activity to do.
Data has become the most important asset in the world today. Financial StatementsEspecially, of high valuewhich explains why hedge funds pay thousands of dollars a month for tools like Bloomberg Terminal and Refinitiv Eikon.
However, there are many companies that offer this data for free. For example, popular platforms like TradingView And Investing cube Loaded with huge historical data. You can use their charts to do your analysis.
A platform like MT5 provides raw data that you can download and integrate into Microsoft Excel to create models.
As mentioned above, there are many uses of historical data in the financial services industry. Let’s break down some of the most important uses of these numbers for a day trader (so that investors can rely on this data).
Back-testing a strategy
Backtesting is a process Using historical data to predict performance From a manual or automated strategy. A good example of this happens when a developer creates an algorithmic tool known as a bot.
Most trading platforms such as TradingView and MetaTrader usually have an Strategy testing tool that automates the backtesting process. You simply need to create a bot and use the Strategy Tester to test its performance using historical data.
Back testing is different from forward testingwhich is a process that uses a model of how a tool like a robot will perform in the future.
Usually stocks and other financial assets Trade in different ways in certain periods. For example, historically there is usually low volatility during the summer months.
Also, Santa’s gathering tends to happen on Christmas Day. Chinese stocks also remained closed during the Lunar New Year. Therefore, using historical data can give you more information about seasonality.
Identify historical fluctuations
Historical volatility refers to the standard deviation of asset prices and how they deviate from their mean.
Since this volatility is related to prices, it is It is based on historical data. It includes calculations such as moving averages and standard deviations.
Another way to use historical data is to identify trends in the financial market. For example, by looking at a stock’s performance over time, you can tell whether or not it’s a good investment.
If the stock is constantly going up, then, as a trend follower, you can buy it and wait for a reversal. Likewise, if the stock goes down, you can use that information to sell the stock.
A common approach to analyzing historical data is known as multiple time frame analysis. This is a process used by a trader or investor Several periods to predict the direction of the origin In the future.
The idea is to use a single period chart It may give you wrong information. As such, traders start their analysis from a longer chart, such as the daily chart and then move down to hourly or daily.
The other way to use historical data is in financial modeling. The financial model for trading is the tool used Evaluate the performance of the strategy.
For example, you can create a financial model that includes several technical indicators to predict the future performance of an asset. The model can also include other external factors such as interest rates.
There are many pitfalls to using historical data in trading and investing. Some of these pitfalls are:
- Historical bias – We recently studied recency bias, which involves looking at the most recent data. There is also Historical bias, which involves relying on historical data. Sometimes, relying on this data can cause you to make mistakes.
- Random The common phrase is that historical performance cannot be used to predict future performance. Besides, there is a condition known as randomness.
- It cannot be used alone – Another thing is that the use of historical data is not enough. Instead, it should always be used In addition to other analysis methods Like fundamental analysis.
This article looked at the concept of historical data and how to put it to good use in the market. As we have seen, historical data refers to all previous figures, including prices, economic figures, and financial performance as well. You can use this data to predict the future performance of a financial asset.
Useful external sources
- 3 ways to back test historical data – middle