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?
***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:
***chart***
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.
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