Time of day
One of the most important highlights of the forex market
is that it is a 24 hour market.
Trading never stops, except on weekends of course. As
the sun moves from one part of the world to another, so
does action in the forex market.
This is a key factor to consider when designing a forex
trading system or method. Depending on the period of the
day you are
trading in the market behaves differently.
Let’s look at some charts that will help you better
understand this issue.
The following is a 5 minute bar chart of the EUR/USD
pair. What is the dominating characteristic in this
chart?
Not hard to spot. Here we can see that the pair is
simply moving sideways hence forming a range. More
importantly,
you can clearly see that the pair is moving not more
than 7-8 pips from side to side. So, not only does the
pair move in a range,
but a narrow range.
Why is this? Why is the EUR/USD moving in such a narrow
range? Very simple question for a very simple answer:
This is because the above chart
represents market action that happened within the Asian
session. It is no a rule written on stone, but as forex
traders we know that the Asian
session means low volatility and sometimes liquidity.
The natural outcome of this is that the market tends to
range in this session.
Now take a look at the following chart and spot the
important difference between the two:
As we can see here there is clear volatility taking
place. The pair moves from about 1.2990 to 1.2927 as
illustrated in point A.
This is more than a 60 pip swing. Point B shows us a 25
pip counter-trend move. Point C is the market action
that occurred a few hours
before what was illustrated in the first chart.
So, why is market action in points A+B so different from
market action in point C? Simply because A+B occurred
during the US session which
is considered a very volatile session, especially if
there are any important news announcements such as
government reports. Again, point C
occurred at the end of the US session and through the
beginning of the Asian session.
What I wanted to achieve in this article is simple. When
designing a forex trading system, specially a forex day
trading system, take into
consideration the markets different characteristics
throughout the 24 hour trading day. For example, try to
use a forex day trading systems
in the US or EU sessions that focus on capturing swings;
in the Asian session try to use range trading
techniques.
Remember, being a successful forex trader requires not
just a simple system but an understanding of many
contributing factors. Time of day
is one of these very important factors.
I wish you all the best in your trading!
Avi Frister
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