Now that you have understood the fundamentals of backtesting, we will explore a case study regarding how to prepare for economic events. BetterTrader’s trade ideas allow traders to master trading strategies and provide immediate results.
Case Study: How to Prepare for Economic Events
In an all-encompassing example, we will explore the effect of the New York Empire State Manufacturing Index on both the USD/JPY (Forex) and Gold (Commodities). Figure 28 shows the New York Empire State Manufacturing Index on a 5-year chart.
In economics, higher economic growth correlates with higher interest rates. Capital will, therefore, flow into the United States, which causes the United States Dollar (USD) to appreciate. However, concepts in economics seldom directly translate to market movements. Markets, a reflection of traders buying and selling assets, tend to move illogically.
The New York Empire State Manufacturing Index is the leading market and the USD/JPY pair is the following market. BetterTrader’s backtester analyzed that the New York Empire State Manufacturing Index released a magnitude of surprise of “Stronger” six times since 2016. Although we may expect the USD to appreciate against the JPY following the New York Empire State Manufacturing Index being stronger than expected, USD depreciated against the JPY five out of six times (Figure 29). By strictly following economic principles, a trader may neglect profitable ventures or, in this case, lose capital.
Gold is also the following market to the New York Empire State Manufacturing Index, the leading market. Since 2016, the index release has been lower than expected, which constitutes a magnitude of surprise of “Weaker,” nine times. The price of Gold went up seven out of these nine times with an average trade duration of 60 minutes. Figure 30 illustrates the impact of a weaker New York Empire State Manufacturing Index on Gold.
In this scenario, the market reacts in accordance with economic principles; when there are lower economic growth rates, traders purchase gold as it is understood to be a risk-off asset. The dichotomy between the trading scenarios for USD/JPY and Gold reveal the inconsistent nature of applying economic principles to market situations. It is far more effective for traders to conduct historical analysis on an independent basis to understand expected market movements. Traders receive this exact historical analysis by using a backtester.
Backtests allow traders to prepare for economic events days in advance. If the New York Empire State Manufacturing Index release is “stronger” than expected, backtesters will instruct traders to sell the USD/JPY pair. If the index is “weaker” than expected, backtersters will instruct traders to buy Gold. The system may also optimize the best time to buy and sell the financial instruments, maximizing reaction speeds and giving traders an edge over those who do not utilize backtesters.
BetterTrader offers a 7-day free trial so that traders may thoroughly examine how the software and data analysis tools work. We recommend following the most interesting events and choosing two to three correlating markets. Backtesting helps traders receive the appropriate analytics of markets in order to make effective and profitable decisions, as highlighted in Figure 31. The BackTester is part of the Pro Membership Plan, which includes full access to BetterTrader’s Analysis tools.