FYI | Dec 14 2011
By David Rodriguez, Quantitative Strategist and Timothy Shea
Summary: For most forex traders, the best time of day to trade is Asian hours. European currency pairs such as EUR/USD show the best results.
In looking at the trading records of tens of thousands of FXCM clients, as well as talking with even more traders daily via webinars, email, and Twitter, it quickly becomes apparent that most individual forex traders are what are called “range traders”. It also becomes apparent that many of them have trouble being successful in forex because they are trading during the wrong time of day.
Most forex traders should trade during the late US, Asian or early European trading sessions – essentially 2 PM to 6 AM Eastern Time (New York), which is 7 PM to 11 AM UK time.
They should avoid trading during the most active times of the trading day. Why? We’ve seen records for thousands of traders, and we’ve seen what works and what doesn’t. Here is a chart of the profitable trades in FXCM accounts in the 5 most popular pairs, displayed by the hour of day:
You can see that this generally correlates with the low-volatility trading hours. Traders tend to see the best results during the low volatility Asia Session hours:
This is because most individual forex traders use “range trading” strategies – buying oversold currencies near support and selling overbought currencies near resistance. These tend to work well during low volatility times, when support and resistance tends to hold. Range traders can incur significant losses when support or resistance is broken, which happens most often during the more volatile times of day.
Do the Hours that I Trade Matter?
Yes, they matter a lot.
We have constructed a strategy that closely models your “typical trader” (You can find a full description of the model strategy at the end of this article). We simulated the strategy’s performance trading the EUR/USD 24 hours a day over the past ten years. The results are not good.
Source: FXCM Strategy Trader.
However, once we factor in the time of day, things become interesting. Let’s say you made a rule to only trade during low-volatility times. This next chart shows the exact same strategy over the exact same time window, but the system does not open any trades during the most volatile time of day, 6 AM to 2 PM Eastern Time (11 AM to 7 PM London time). The difference is dramatic:
Euro/US Dollar RSI Strategy Restricted to Trade between 2:00 PM and 6:00 AM Eastern Time
Source: FXCM Strategy Trader.
By sticking to range trading only during the hours of 2pm to 6am, the typical trader would have been far more successful over the past 10 years than the trader who ignored the time of day.
What About Other Currency Pairs?
Of course, not all currencies act the same. For example, the Japanese yen tends to see more volatility during Asian hours than the Euro or British Pound, since that is the Japanese business day.
We simulated the same strategy, with several different possible time settings for the 3 major European pairs:
The above chart shows combined results for the strategy on the EUR/USD, GBP/USD, and USD/CHF during different time frames (in the New York Timezone). As you can see, using this strategy overnight during Asian and early Euro session has yielded much better results than our baseline 24 hour RSI.
We find that the same time filters work very well for the EUR/USD and USD/CHF, as they are closely correlated. The filters also work fairly well for the GBP/USD. You should range trade these currency pairs during the 2 PM to 6AM time window.
Unfortunately, out optimal time window does not work well for Asian currencies. Our tests of different time windows on the USD/JPY, AUD/USD, and NZD/USD have not produced a single positive equity curve over the past 6 years. This is due to the fact that these currencies are more often subject to large moves during Asia Session than the European currencies.
It is worth noting that the time of day can have a significant affect on returns in these currencies as well. 24 hour trading shows far greater losses than the other time windows.
Game Plan: What Strategy Should I Use?
Trade European currencies during the “Off Hours” using a range trading strategy.
Our data show that over the past 10 years, many individual currency traders have been successful range trading European currency pairs during the “off hours” of 2 PM to 6 AM Eastern Time (7 PM to 11 AM UK Time). Many traders have been very unsuccessful trading these currencies during the volatile 6 AM to 2 PM time period. Asia-Pacific currencies can be difficult to range trade at any time of day, due to the fact that they tend to have less distinct periods of high and low volatility.
Model Strategy: Range Trading with RSI on a 15 Minute Chart
For our models, we simulated a “typical trader” using one of the most common and simple intraday range trading strategies there is, following RSI on a 15 minute chart.
Entry Rule: When the 14-period RSI crosses above 30, buy at market on the open of the next bar. When RSI crosses below 70, sell at market on the open of the next bar.
Filter: Strategy cannot enter trades between the “end hour" and the next “start hour".
Exit Rule: Strategy will exit a trade and flip direction when the opposite signal is triggered.
As was shown earlier, this strategy has worked best over the past 10 years using European currency pairs and setting the start hour to 2 PM and the end hour to 6 AM Eastern Time (New York).
The Traits of Successful Traders
This article is a part two of our “Traits of Successful Traders" series.
Part One: What is the Number One Mistake Forex Traders Make?
Over the past several months, The DailyFX Research team has been closely studying the trading trends of FXCM clients, utilizing the enormous amount of trade data at FXCM. We have gone through an enormous number of statistics and anonymized trading records in order to answer one question: “What separates successful traders from unsuccessful traders?”. We have been using this unique resource to distill some of the “best practices” that successful traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs, and more.
The views expressed are not FNArena's (see our disclaimer).
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Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
