This is part 2 of my 7-part series on trading strategies. Click here for part 1: The Real Reason.
Forex Trading Strategies #2 – The Right Timing
One of the great advantages of Forex is that the market is open 24 hours a day, from Sunday U.S. evening to Friday U.S. afternoon, or a total of around the clock 5 and half days of trading per week. Now to understand the Right Timing, we need to look at the trading schedule just a bit closer:
- 5:00pm EST (10:00pm GMT *) Sydney Market Opens
- 9:00pm EST (2:00am GMT *) Tokyo Market Opens
- 3:00am EST (8:00am GMT *) London Market Opens
- 9:30am EST (2:30pm GMT *) U.S. Market Opens
(* Consider Daylight Saving Time when referring these schedules.)
As the U.S. Market closes at 5:00pm EST, the Australian market opens again for the new day and the whole cycle repeats until Friday U.S. afternoon, when the week ends… The whole cycle starts again on Sunday U.S. afternoon, which is equivalent of Monday morning in Australia… Now if you have been trading for a while, you’d probably know this already, but just bear with me a little longer, I’ll get to the point…
The key to determining the Right Timing rests on Market Liquidity. Market Liquidity is defined (Wikipedia) as:
… Market liquidity is an asset’s ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash, is the most liquid asset, and can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs. However, currencies, even major currencies, can suffer loss of market liquidity in large liquidation events.
In a nutshell, when there are plenty of liquidity, market is less volatile in general; but the opposite is also true when large liquidation events takes place, such as news releases or large order flows, which causes the liquidity to dry up as the entire market trends in one direction (it’s actually good news for retail traders because you can just follow the market – more on that in future strategies…) The Right Timing has everything to do with liquidity because market will move randomly or even go against trend in a lower liquidity environment with just a few dealers colluding to corner the market and pick their teeth your tiny trading accounts.
So you guessed it, The Right Time to trade different pairs has to do with their Market Open time… Because it makes no sense to even look at a pair unless its market is open… For instance, the GBPUSD pair: If you trade this pair between 5:00pm ~ 3:00am, since the liquidity is so low at less than 1% of the market volume, you are better off focusing on the GBPJPY instead because the Japanese market is open at that time… Here is a quick rule of thumb for determining what currencies to trade at what time:
- 5:00pm ~ 3:00am EST – AUD, NZD, USD, JPY
- 3:00am ~ 8:30am EST – EUR, GBP, CHF, USD, JPY
- 8:30am ~ 5:00pm EST – EUR, GBP, CHF, CAD, USD, JPY
Note that USD and JPY are available to trade during all hours, since USD covers 84% of all exchanges, and JPY is considered as a reserve/carry currency.
So next time you plan to trade, check your watch first and don’t just take a trade because the “charts” look good… Considering the liquidity factor will not only give you an edge in trading, but also add consistency to your overall account performances as you avoid the randomness during the thin liquidity hours.
Forex Trading Session Dissected
Here’s something interesting and extremely important, and this is what I call the “3rd dimension” into trading… Most traders look at price action and/or currency charts and plan their entries, although there is nothing wrong with that approach, there is actually another facet to trading which will increase your profitability and consistency drastically… But before we dig into this so-called timing dimension, let’s take a quick look at “human habits”, yes – human habits…
Contrary to public believe, institutional traders who work for banks and investment firms do not trade 24 hours a day… they usually have pretty mundane hours like the rest of us, and yes, you are right, they eat lunch, try to get out of work early to beat the traffic, and have the same emotions of fear and greed when it comes to trading…
So when a trader goes to work, let’s say for Citibank of London at 3:00am, and he saw the market pushing EURUSD up on some Asian news, and decided that perhaps EURUSD is too high, especially with news coming up at 4:00am out of Euro Zone, he decides to SELL the EURUSD.
And as you can see in the chart above, market turns around when the dotted green lines end, which correspond to European Market open; market also turned around again around the vertical red line, which correspond to U.S. Market Opening… If you just go back and look at the charts of EURUSD, GBPUSD, or any major pairs, you’ll see that this pattern repeats time and time again, so much so that sometimes the highs and lows are pretty much defined by these timing!
I can already see a light bulb going off, it is pretty earth-shattering for me when I first discovered this… I mean I know the saying that trying to predict top or bottom of the market is like trying to catch falling knives, but armed this revelation, you can surely predict when it is going to turn!
Here are some ideas to get you started on plannin for the right timing:
- What to do around market closing time? I’d expect some profit taking as traders protect their profits… You know, going home and not having to worried about open positions, so whatever gains you saw during the session, expect some retracements… and it is probably best to get out and take your profits.
- What to do during the middle of the trading session? I usually gauge middle part of the session at least 3 hours away from the next market open, and it usually means since there are still plenty of time, if I am in a trade with good fundamental reason, I would extend my TP and let it ride…
- What to do around market opening time? I’d pay attention to 2 major opens, the European and U.S. open; if I see strong movements during previous sessions, I’d usually expect the market to turn around unless the reason for the strong movements is a long lasting one… Let’s say that we saw some sell-off in EURUSD on risk aversion sentiment due to Australian news… I believe EURUSD could turn around at the open, especially if it is trading weaker during Asian session… However, if the reason for EURUSD weakness is due to some rumor or news out of Europe for another Greek Bailout or something, then expect the market to be even more bearish…
I hope this article helps you in your trading and opens a new dimension in your decision making. If you enjoy this article or have tips to share on how you use timing, please don’t be shy and leave a comment below, remember to sign-up for my newsletter!