Indicative prices are data prices that reflect only an indication of what occurred (if you are looking at historical data), or what is occurring (if you are looking at live prices). Indicative prices reflect a price of market consensus from various data brokers and dealers of what the price could reflect at any one point in time, the pricing could be either the median (the quantity of brokers/dealers that represent the most common price) or the average price. They could also be the bid, ask or mid prices from the quotes received from brokers.
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 was “indicative” you would notice that the candlestick bodies would be smaller while the wicks from both ends would be longer as compared to more pure forms of historical data such as those which are purely bid, ask or mid pricing.
Indicative Price Problems
The primary problem associated with indicative prices is that it might not accurately represent the actual data of the forex market from your forex broker. The importance of this would lie in back-testing a certain system in the past and then replicating its performance in the future.
I have known that when I have back-tested a system in the past on indicative prices I have received great results, but when I have then traded this system real-time I receive totally different results – even when the exact same trade is tested again on the same time period I traded the signal!
What should I do if I have indicative prices?
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. 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 – at least you only lost a small amount of capital. Unfortunately this is the lure that many data providers use to get your cash off of you, and it is why it is 100% essential to make sure you know exactly what you are buying from the vendor before handing over your hard-earned cash. Even ask for a sample!
We all know that it is 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… just what do we choose from? To be honest, either of the three does not 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 obviously represents the middle price of both the bid and ask prices. All you would need do is then find out what the spread of your broker is for the historical data you have of that particular currency and you have an exact representation of what the bid and ask price was of that currency 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 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 instead of the bid price 30 minutes later 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 1200 EST on 1 April 2004 as 1.2452 then I would 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 price 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 equal!
While indicative data can be cheap (or free) to obtain, it might not be the most meaningful form of data to use when backtesting your forex trading system.
If you do wish to use indicative prices be very cautious with the results and double your slippage settings (at least).