bid & ask prices and technical indicators
I have a data set with historical prices (forex but I'm assuming it can be about stocks as well) - open, low, high, close - but there's two of each - bidopen, askopen etc. I want to use those data for calculation, for example MACD or stochastic oscilator. It would be easier if there was just the set of four prices for each day - but the set of data I have confused me.
If I want to do calculations - do I need to calculate average for every bid-ask pair, for example if I want open for a particular day do I calculate bidopen+askopen/2 ?
In both cases - MACD and stochastic oscillator - the calculation are meant to set points of buying and selling, but I buy using ask prices and I sell using bid prices... I know I am missing something but googling failed, I guess I don't know how to ask. I hope I managed to explain what is my problem above though.
Can somebody please explain what I'm missing? Or suggest sources where I could learn. Or both...
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If you are looking to go long (buy) you would use bid prices as this is what you will be matched against for your order to be executed and a trade to go through.
If you are looking to go short (sell) you would use the ask prices as this is what you will be matched against for your order to be executed and a trade go through.
In your analysis you could use either this convention or the midpoint of the two prices. As FX is very liquid the bid and ask prices would be quite close to each other, so the easiest way to do your analysis is to use the convention I listed above.
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