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To successfully navigate recent volatile FX markets, which is the largest most liquid global financial market, requires access to the best quality trading data available.

Historical data can serve as a valuable tool for both sell-side and buy-side institutions to develop and back test their strategies before executing transactions.

Utilizing composite data is a component of the required data, to make informed FX trading decisions, but increasingly, FX market participants are seeking high-quality, accurate, bespoke data, which firms such as TraditionData provide their clients. Our FX market data assists with required insights and depth of market knowledge to help their client’s trade successfully in such a competitive marketplace.

Historical data is extremely useful, as it allows traders to analyse prior market trading behaviours and patterns to assist and support their trading decisions. By gathering and analysing relevant information on the market, including historical trends, current economic indicators, and news events, to pre-trade processes, allows institutions and traders to make fully informed decisions based on an understanding of the historical data and applying that analysis to current market conditions.

Historical data can also help trading managers identify key support and resistance levels that can indicate the entry and exit points at which buyers or sellers initiate trades. By leveraging historical pre-trade data, they can better assess risk, identify profitable opportunities, and optimise trading strategies. Additionally, pre-trade data can help reduce transaction costs and improve overall portfolio performance. In short, such data provides a crucial foundation for successful trading in a complex and dynamic financial market.

How finance professionals can leverage historical data

Through detailed examination of a market’s past behaviour, traders and investors can gain perspective by analysing and identifying trading patterns, using recorded market-related data points, such as price and volatility, and applying that data to current market conditions The information obtained through this process can be useful in running simulations to a potential new strategy while also looking to modify and improve an existing trading model.

Historical data can provide valuable market insight by allowing managers to examine the past performance of a financial instrument or market, enabling them to distinguish between typical and unusual market conditions, tied to market volatility. Additionally, analysing trends in the forex market, using historical data, helps trading advisors to anticipate future market movements.  

Risk analysts can also use historical data to assist in determining credit, value at risk (VAR) and margin methodologies for their financial institution, to establish policies and procedures to current market conditions.

Insight into liquidity, spreads, order size and risk

Analysing historical data can also reveal patterns and trends in market behaviour during different time periods. For example, during times of market stress or uncertainty, bid-ask spreads may widen, and order sizes may become more concentrated as market participants adjust their trading strategies.

Examining historical bid-ask spreads can reveal trends in liquidity levels in the market. Technology advancements also has had a big impact on bid-ask spreads. As FX products, such as Spot and short dated FX forwards have become more “commoditized’ through electronic execution, price transparency in those products has grown. This has caused bid-ask spreads to compress. Conversely, FX derived/structured products such as longer dated FX forwards, longer dated NDFs and FX Options, remain predominantly voice executed, just by the structured nature of these products.

Therefore, the bid-ask spreads have not compressed as much, due to the lack of price transparency. In both cases, as Institutional FX trading is moving more from voice to electronic execution, along with increased demands from the regulators and compliance departments of financial institutions, there is a greater emphasis on securing FX market data.

According to a study conducted by the Bank for International Settlements (BIS) in 2019, bid-ask spreads in the FX market have generally decreased over time, indicating increased liquidity.

TraditionData’s strengths in FX market data is clearly in the FX derivatives and less liquid, more esoteric currencies. As one of the leading global interdealer brokers (IDBS), Tradition has a strong presence in voice brokered FX products like Emerging Market Non-Deliverable Forwards and FX Options.

By being the dominant IDB in these products, along with the demand for FX market data continuing to grow, as a business we are well positioned to provide required market data to financial institutions, in the more opaque FX products, like NDF and FX Options. We have historical market data across FX Spot, Forwards, NDFs and FX Options, as well as customizable daily market data.

Historical data can be also used to assist with risk management strategies. By analysing past market behaviour and identifying potential risks, financial service professionals can develop strategies to mitigate those risks and protect their investments. It can also play a pivotal role in creating predictive models aimed at anticipating market behaviour. The more historical data points, managers can incorporate into their modelling, the more accurate they are at identifying potential market trading opportunities, as well as market risks and risk mitigation.

Optimising trading strategies – back testing is best

In addition to aiding in making market predictions, historical data can also assist in back testing trading strategies, by running trading simulations on that historical data, to stress test, the overall performance of that strategy against the relevant dataset. By utilising historical data, back testing can help traders evaluate the effectiveness of their strategies and make informed decisions about future trades. Only bespoke, tailored data can provide traders with the insight into how a trade would have performed, under different market conditions, and identify areas for improvement. Having accurate, unbiased historical data, sourced from the interdealer markets is a necessary component to confirm the overall performance of a trading strategy.