As many of you may already know - if you have been following my blog for a while - I have become a somewhat "regular" contributor to Currency Trader Magazine, one of the most well-known and respected magazines published in the area of forex trading. Besides featuring very famous and well-respected authors such as Barbara Rockefeller, the magazine tries to give people quality articles about both fundamental and technical aspects of currency trading. I have to say that Currency Trader Magazine had become a monthly "must-read" for me before I started writing in it, with its articles being very good to catch both a bird's eye view and a practical perspective over current market conditions but being an author now gives me the opportunity to humbly contribute to this great monthly magazine. On today's post I want to talk to you a little bit about my June article and how I think it provides very valuable information about market inefficiencies and the way in which they evolve over time. You can download the June edition of the Magazine -containing my article- for free here(if it is already August and you're reading this then you will have to purchase the issue separately).
The article I wrote for the June issue attempts to address a significant question I had been asking myself for a while. Is the market so inefficient that the movements within trading sessions are predictable ? I wanted to take a look at the Asian session in particular and answer this interesting question regarding whether or not we could look at this session for a period of 4 years and predict the future magnitude of absolute movement and the range within this trading session. Would it be possible that the market moves in a predictable way during this period of low volatility ? I started to do some research to find out.
In the article I go through an analysis of the Assian session's range and absolute movement within the past 4 years on the EUR/USD, EUR/GBP and EUR/CHF attempting to find a "pattern" of evolution that could signal the existence or absence of a "predictable movement" within this session. Of course, part of this research was inspired in the fact that many commercial system sellers have attempted to exploit inefficiencies around this session that have worked for a while and have then become obsolete. I have always thought that there is some predictability around the Asian session but attempting to exploit it without any adaptability is simply a behavior prone to eventually fail (you really wonder how many of those sellers are really traders).
The results I found were - for me - absolutely breath taking. The analysis of absolute movement values for the three different pairs revealed nothing spectacular, showing that the ranges evolve widely as the market changed. Effectively this proves why Asian session scalpers are doomed to fail, the character of the session changes tremendously with time and exploiting it using such systems in the long term is not going to work. However I then took a different look at the picture and evaluated the range and absolute movements differently - taking certain additional market elements into account- obtaining a wonderful result. As a matter of fact, what I found confirms what I have suspected for a long time.
Not only are the Asian session conditions predictable, but they are almost the SAME for the EUR/USD, EUR/GBP and EUR/CHF. This means that my article found a key part of fundamental market behavior, a characteristic of the market that appears to remain unchanged as time goes by. Of course, the details of this analysis cannot be revealed here (you need to go ahead and read the article ! :o) ) but you will see that my analysis shows clearly that the Asian session is technically inefficient and that creating systems to exploit this inefficiency is indeed possible. During the next few months I will be working on the creation of several different mechanical trading systems to use this research to show that effectively the behavior within the Asian session lends itself to mechanical exploitation.
I hope you have read and enjoyed this post and my June article. Please leave any comments, questions or suggestions you may have :o). As always, if you want to learn more about my work in automated trading and how to use forex trading systems that use sound trading techniques to be likely profitable in the long term please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
The article I wrote for the June issue attempts to address a significant question I had been asking myself for a while. Is the market so inefficient that the movements within trading sessions are predictable ? I wanted to take a look at the Asian session in particular and answer this interesting question regarding whether or not we could look at this session for a period of 4 years and predict the future magnitude of absolute movement and the range within this trading session. Would it be possible that the market moves in a predictable way during this period of low volatility ? I started to do some research to find out.
In the article I go through an analysis of the Assian session's range and absolute movement within the past 4 years on the EUR/USD, EUR/GBP and EUR/CHF attempting to find a "pattern" of evolution that could signal the existence or absence of a "predictable movement" within this session. Of course, part of this research was inspired in the fact that many commercial system sellers have attempted to exploit inefficiencies around this session that have worked for a while and have then become obsolete. I have always thought that there is some predictability around the Asian session but attempting to exploit it without any adaptability is simply a behavior prone to eventually fail (you really wonder how many of those sellers are really traders).
The results I found were - for me - absolutely breath taking. The analysis of absolute movement values for the three different pairs revealed nothing spectacular, showing that the ranges evolve widely as the market changed. Effectively this proves why Asian session scalpers are doomed to fail, the character of the session changes tremendously with time and exploiting it using such systems in the long term is not going to work. However I then took a different look at the picture and evaluated the range and absolute movements differently - taking certain additional market elements into account- obtaining a wonderful result. As a matter of fact, what I found confirms what I have suspected for a long time.
Not only are the Asian session conditions predictable, but they are almost the SAME for the EUR/USD, EUR/GBP and EUR/CHF. This means that my article found a key part of fundamental market behavior, a characteristic of the market that appears to remain unchanged as time goes by. Of course, the details of this analysis cannot be revealed here (you need to go ahead and read the article ! :o) ) but you will see that my analysis shows clearly that the Asian session is technically inefficient and that creating systems to exploit this inefficiency is indeed possible. During the next few months I will be working on the creation of several different mechanical trading systems to use this research to show that effectively the behavior within the Asian session lends itself to mechanical exploitation.
I hope you have read and enjoyed this post and my June article. Please leave any comments, questions or suggestions you may have :o). As always, if you want to learn more about my work in automated trading and how to use forex trading systems that use sound trading techniques to be likely profitable in the long term please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
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2 comments:
Daniel-
Great article and i've been thinking about that same issue lately - why so many commercial EA's trade successfully during Asian trading hours.
I suspect the reason why they trade successfully is because of a concept you mentioned in your E-book "Market Reversion Theory".
The idea is that any moves made in that time are likely to be reverted or re-traced. I saw this first hand when my Megadroid trade went 70 pips against me, just to come all the way back to scratch within an 8 hour period.
I think the reason for this lack of directionality is the absence of fundamental news developments during this time.
Its the mirror image of Friday at 8:30 AM EST when the jobs report comes out during which time you have a high likelihood of a directional move.
So the challenge is how to measure this statistically. Pip range or range as percent of ATR doesn't quite capture it.
Perhaps a better question is the following: How often (in percentage terms) does the price at the Asia close (4AM EST) exceed the price during the dead zone (5PM-8PM EST) by more than that 14-bar ATR?
I suspect the answer is not very often because not much fundamental to the EUR/USD is likely to occur during that time.
Getting back to the Friday at 8:30AM timeframe, its very difficult to determine which direction that highly directional move will take. Your chances are certaintly not much better than 50%.
But in the Asia session, I suspect the odds are hightly likely that the ATR will not be exceeded. In other words, its much easier to predict that nothing will happen, since nothing happens 90% of the time.
Its like the Seinfeld episode where they are proposing the pilot of the TV show and Jerry says "and then something has to happen", and George says "nothing happens", that's the point. Its a show about nothing.
Anyway i'm rambling now, too much caffeine.
Let me know what you think of that,
Chris
Hello Chris,
Thank you very much for your comment :o). My study of the Asian session shows that the characteristics of this trading time evolve drastically as times change reason why I think that most commercial experts that have been or were successful will fail to succeed in the long term if they lack any adaptive criteria. The truth is that the Asian session's volatility seems to be limited and predictable but only if you adapt your expected results against market conditions. All commerical robots I know that trade this session do not do this and as volatility increases in the future they will simply get killed as movements within the Asian session will get much larger and "unpredictable" as per their coding.
There is also a problem regarding the assumption that low volatility implies lack of directionality. If you analyse the Asian session closely you will notice that although the session is not very volatile, it is not true that it is not directional. In fact, assuming this to be the case to design a trading system will end with failure as the session does show trending - although clearly in a much smaller degree - than the rest of the trading times. Analyzing four years of Asian session trading day-by-day allowed me to see this happen quite frequently.
The fact that the session is less volatile than the rest of the trading times does not imply the presence of exploitable inefficiencies since this information is "already known" to all market traders. It is important here to note that my finding points out that the average absolute movement and range are almost constant as time changes when compared against some volatility criteria, this in turn may be an important piece of information not currently technically evident which in turn might be useful for the development of strategies.
To assign the lack of fundamental developments to the lower volatility of the Asian session is also most likely wrong since the lower volatility is due to the fact that the main trading parties involved US/EU/UK banks are closed at the time. It is actually low volatility due to low liquidity/volume, with the lack of substantial US/EU/UK news being only a minor contributing factor.
Again, having the information regarding the low volatility of the session is not enough information to develop a system and current systems that assume non-directionality are also bound to fail as volatility increases. In the end, I hope I'll answer all questions you may have about this when I show my systems developed around my findings during a future edition of Currency Trader Magazine :o)
Again you have succeeded in starting some very interesting discussions Chris. Thank you very much for your comment :o),
Best Regards,
Daniel Fernandez
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