Forex Trading: Do You Have the Time?
To aid the forex trader still deciding on what to examine, Adam Lemon of DailyForex.com highlights the one factor that is oft overlooked-but which can be a surprisingly powerful element within a trading strategy-the time of day.
Forex traders searching for a profitable trading method usually look at candlestick analysis, fundamental economics, trends, and overbought or oversold indicators as guidelines for when to enter and exit trades. There is another factor that is often overlooked, but which can be a surprisingly powerful element within a trading strategy: the time of day in forex trading.
Volume and Time of Day in Forex Trading
It is well known that the majority of forex trading by volume occurs during the London and New York sessions with the peak period occurring during the overlap between the two. For this reason, many traders-especially day traders-prefer to trade between 8:00AM London time and 5:00PM New York time. Traders that live in time zones which render these hours' inconvenient face a dilemma which they often try to resolve by trading only longer-term time frames such as the daily chart, or perhaps a 4-hour chart, or maybe by focusing on Asian currencies which are assumed to be more active during Asian business hours than non-Asian currency pairs.
This two-pronged approach can use time of day in forex trading to determine which currency pairs should be traded and at which times of the day. Some analysts like to measure average volatilities of various pairs during the different time zones and conclude that the best thing to do is trade a currency pair during the times when it is statistically most volatile. This may be oversimplifying things, however, because volatility does not necessarily equate with direction. In other words, just because the average range of a session is 80 pips for EUR/USD, for example, does not mean that it is 80 pips in one direction.
Session Opens and Closes
Extra power can be derived by seeking to enter trades very close to the beginning or end of a major financial center's business hours. This is because it is at these times that major reversals in price occur disproportionately often, so these are the times where getting in early just as a reversal takes place can really pay off.
I constructed a case study with a large sample size in an attempt to prove my points about the time of day in forex trading by means of a comprehensive back test.
I took the USD against the seven other major global currencies, creating a total of seven forex currency pairs. The time range of the back test was from 2002 until the end of 2015.
Trade entries were made in line with both the three- and six-month trends. Entries were triggered from a 4-hour chart where a candlestick made a lower low than the previous four candlesticks and then broke to the upside within the next candle (for long entries), with the stop loss being placed just the other side of the candle. For short entries, the method was simply reversed.
The 4-hour time period was chosen fixed to London time, as the opens and closes of these candles mark some crucial times of day:
- Midnight London time is often used as a benchmark for daily trades.
- 8:00AM is the traditional start of the London session and is close to the end of the Tokyo session.
- Noon time is close to the New York open.
- 4:00PM and 8:00PM overlap with the New York session.
By Adam Lemon, Contributor, DailyForex.com