Analysing the markets with the use of statistics is not very common in general, however it is a great addition to a more familiar technical analysis. You do not even need any special utilities, just a trading platform with a high quality data and excel. Statistics are used for the following:
- Formulation of logical expectations because numbers are not lying. If you calculate that a certain phenomenon has a probability of 74%, you can trust this number. Knowledge of statistics will help you to keep up with your initial trade idea and not panicking unnecessarily.
- Statistics, unlike the indicators that constantly count on the same formula all the time, give answers to more specific questions. For example, you can figure out how likely it is that the German stock index DAX will close off the range of the previous day. The answer to this question is that for the past 967 days, DAX closed the range of the previous day in 50.4%.
- We can create simple statistics where we take into account only one situation or more complex statistics where we consider a whole series of situations. A more complex question might be, for example, if Friday's currency pair was trending fast and growing all day in an above-average range, is the next Monday also going to trend in the same direction?
- We can also formulate a short-term and a long-term statistics. Let’s have a look now at one example of simple long-term statistic.
Because we have the beginning of September, we are logically interested in what we can expect to see in September, including the most traded currency pair EURUSD. The questions are as follows:
- Is September usually trending upwards or downwards?
- If July is trending upwards and August is trending upwards as well, will September be trending upwards as well?
- In case the year-to-date figures (up till 31st AUG) is trending upwards, will September be trending upwards as well?
Answers will be as follows:
- Since 1997, September has been growing in 62% and in 38% declining. Over the last 10 years, however, it has been completely balanced. Last time in 2017, September was trending upwards.
- Following are the results since 1997:
From the above table we can see that if the price trend in July was descending and August also descending, the September was Ascending only in 1 case and in 3 cases descending. The current situation is very interesting, July was Ascending this year and August was descending. When this happened in the past, there has always been an ascending September. So if you buy EUR/USD at the end of August or early September, you will be profitable by the end of September.
- If we take the opening price of the EUR/USD currency pair on 1st JAN and the closing price as of August 31st, we find out that over the past 21 years, this currency pair has been trending downwards (descending) in 10 cases and in 11 cases it has been Ascending. In 2018, we have a period from 1st JAN – 31st AUG Descending. Subsequently, September was Ascending in 60% of cases and Descending in 40% of cases.
Lastly it is important to mention that in these cases there are more probabilities of an Ascending September, it is also wise to remember that statistics evolve all the time. If we were to do this statistic after another 10 years, the results could vary.