How to calculate deviation from forex news forecast
Calculating deviation from a forex news forecast involves comparing the actual market movement to the predicted movement based on the forecast. Here's a step-by-step guide to help you do so:
Step 1: Obtain the forecast
Get the forex news forecast from a reliable source, such as a financial news website, a forex broker, or a technical analysis tool. The forecast should provide the expected price movement (e.g., 50 pips up or down) and the expected time frame (e.g., 30 minutes, 1 hour, etc.).
Step 2: Determine the actual market movement
Obtain the actual market price movement during the specified time frame. You can use a forex trading platform, a charting tool, or a data feed to get the actual price data.
Step 3: Calculate the deviation
To calculate the deviation, you need to calculate the difference between the actual market movement and the predicted movement. You can use the following formula:
Deviation = (Actual Market Movement - Predicted Movement) / Predicted Movement
Where:
- Actual Market Movement is the actual price movement during the specified time frame.
- Predicted Movement is the expected price movement based on the forecast.
For example, if the forecast predicts a 50-pip up movement, and the actual market movement is 60 pips up, the deviation would be:
Deviation = (60 - 50) / 50 = 0.2 or 20%
This means that the actual market movement deviated from the predicted movement by 20%.
Step 4: Interpret the deviation
The deviation value can be interpreted in different ways, depending on your trading strategy and risk tolerance. Here are some common interpretations:
- A small deviation (e.g., 5-10%) may indicate that the market movement was close to the predicted movement, and you may consider sticking with your original trading plan.
- A moderate deviation (e.g., 10-20%) may indicate that the market movement was slightly off from the predicted movement, and you may need to adjust your trading plan accordingly.
- A large deviation (e.g., 20% or more) may indicate that the market movement was significantly different from the predicted movement, and you may need to reassess your trading plan or adjust your risk management strategy.
Example
Suppose you receive a forecast that predicts a 100-pip down movement in the EUR/USD pair during the next hour. You enter a short position at the market price of 1.1000. After one hour, the market price is 1.0990, which means the actual market movement is 10 pips down.
To calculate the deviation, you would use the following formula:
Deviation = (10 - 100) / 100 = -0.9 or -90%
This means that the actual market movement deviated from the predicted movement by 90%. In this case, you may need to reassess your trading plan or adjust your risk management strategy.
Remember that forecasting is not an exact science, and deviations from the predicted movement are common. By calculating the deviation, you can better understand the accuracy of the forecast and adjust your trading strategy accordingly.