Market Timing PART I

August 2, 2008 at 9:39 am Leave a comment

By FX Insights

Market Timing PART I

This week in the chat the trade strategy of “market timing” was brought up. I think the timing of trades is incredibly important because the market will typically do certain things at certain times of the day, week, month, and quarter, in addition to seasonal timing patterns.

Of course there are no absolutes when it comes to timing in the market as it relates to moves with the EUR/USD, but this pair has shown fairly consistent patterns that I’ve recognized after watching the pair 24/6 for the past year. 
While we cannot know exactly when a central bank, big institution, or hedge fund is going to throw a couple hundred million or billion to into the market, which will shake things up, the following factors I believe should be considered when placing trades, especially if they are intraday trades as opposed to swing trades. 

Before we dig into the market timing thing, go into this knowing that there’s a high probability that when you place a trade, especially in lower volatility times, your broker is going to take the opposite side of the trade to either stop you out (if you use stops) or to shake you out of the trade and cause you to close for a loss. Brokers can and do manipulate the price – so when you place a trade you will notice the market immediately jumps the opposite direction of your trade – it’s pure broker manipulation and just part of the game. 

Same situation with stops, if you’ve ever used them, I’m sure you can recall numerous times when the market hit your stop loss, it has turned around, and gone the other way. Because a lot of retail traders are using the same tech indicators, they are placing stops in the same general areas, which make it easy for brokers to manipulate the price just enough to trigger stops on those technical levels.

NOTE: The following info is strictly geared towards market timing patterns of the EUR/USD.

Market Timeframes

The market re-opens for the day, so-to-speak at 5:00 pm eastern time, so we’ll start here going forward. When the market “re-opens” for the day, the liquidity is very low. The beauty of these times is that the market will carve out a range that is perfect for intraday trading, banking 5, 10, 15 pips per trade. If you track EUR/USD price action (30min EUR/USD price opens), it will be easy to establish a range during these low liquidity times… 

5:00 pm to 8:00 pm eastern – Europe, London, and Tokyo are all closed, meaning the market is thin. In most cases, a fairly established range is carved out during this timeframe. Typically, the EUR/USD will stay where it’s at when NY closed, and then tend to drift upwards going into the Tokyo session. We have observed that the typical pattern is for the EUR/USD to slightly move higher – not an absolute, just a common tendency. 

8:00 pm to Midnight eastern – Tokyo is open, however, the market tends to stay thin the first 4 hours of the Tokyo session. Now most times of the year, the market will stay in a range during this timeframe, but there are certain times of the year that the Bank of Japan (BOJ) will take actions to manipulate the market, typically to depreciate the yen for exporting reasons. In addition, the BOJ will diversify their FX reserves at certain times of the year. These actions will cause across-the-board movements in the market. I’ve observed that the EUR/USD will make its biggest moves during the Tokyo session in the late winter and early spring periods. And those big moves usually start between 9:00 pm and 11:00 pm eastern and can keep the market moving right up until Europe/UK opens. 

2:45 pm and 3:45 pm TOKYO TIME – please note the following pattern happens at 2:45 and 3:45 pm TOKYO TIME, not eastern… For many, many months I observed a EUR/USD pattern that would happen during Tokyo’s afternoon session… typically around 2:45 pm Tokyo time, the EUR/USD would make a quick spike up of about 10-20 pips, and then sometimes it will do the same around 3:45 pm Tokyo time, give or take a few minutes… why this happens, I have no idea. I have no clue what goes on in Tokyo at those times to make the EUR/USD jump, but it’s been a consistent occurrence, and I have benefited from those moves over and over again. 

Final 10-20 minutes of Tokyo – during the final moments of Tokyo, traders will be squaring their books for the day, so it is common to see the market move when books are squared. 

2:00 am to 8:00 am eastern – At 2:00 am Frankfurt/Berlin open. At 3:00 am London opens. When Frankfurt and London open, liquidity floods into the market and the market will move, you can be assured of this. The following are some EUR/USD patterns I’ve noticed during this timeframe… many times the market will bring down the EUR/USD anywhere from 20 to 80 pips, especially during market periods of USD strength. So, if you’ve taken a EUR/USD short at the top of the Tokyo range, waiting for Europe/UK to come into play to close your short might be a good idea as it will allow you to close your trade for more pips.

Now, during times of EUR strength, like we’ve seen over the past few weeks, Europe/UK will only bring the EUR/USD down a few pips or none at all, and then within 2-4 hours into those sessions, you’ll see the market moving the EUR/USD up. If you recognize the market not bringing down the EUR/USD in the earlier part of the Europe/UK session, but maintaining top-of-range levels, or moving it up, this is a pretty good indicator the EUR/USD will overall go up during the trade day… 

Finally, between 4:00 am and 7:00 am, it is common to see decent EUR/USD movement of anywhere from 30-70 pips or more, depending on market conditions of course. The 2:00 am to 8:00 am eastern timeframe by far offers some of the highest volatility the market will see and great opportunities to bank pips and ROI. 

8:00 am to 5:00 pm eastern – while waiting for NY to open, the market will typically slow down the pace, especially if big economic data is going to be released. Most potentially market-moving data is released at 8:30 am and or 10:00 am eastern, and we all know what happens when those big reports come out… 

It’s important to note two specific time frames during the NY session…
11:00 am eastern – Europe closes… the last 10 minutes of Europe’s session can be volatile as they close out their books for the day. EUR/USD movements during this timeframe can be anywhere from 10 to 40 pips. 
Noon eastern – London closes… as with Europe, London’s last 10 minutes can be volatile as they close our their books for the day. 

So, if the market took the EUR/USD up during the earlier part of the NY session, patterns show us the euro will stay up throughout the rest of the session. And then specifically, you can see the EUR/USD make additional moves at 1:00 pm and 3:00 pm eastern time. 

After 3:00 pm eastern, the market usually levels off and will fall into a range right until the market “closes” and then “reopens” at 5:00 pm eastern. 
Of course, the EUR/USD should be closely watched at 9:30 am eastern when Wall St. opens. Because of the correlation to equities, bonds, gold, and oil, we can see the EUR/USD move up or down accordingly when Wall St. opens. 

Days of the Week Timing

EUR/USD patterns have shown us that this pair is likely to make either its high or low for the week on Monday or Friday. Sometimes the Sunday into Monday session, the EUR/USD will drop. Friday’s tend to be a very strong day for the euro – I’ve observed the EUR/USD make some of the biggest topside gains on Fridays – I’ve seen the euro finish strong on Fridays much more than the dollar has. 

As far as pip movements go, Tuesdays and Wednesdays are some of the more volatile days of the week. Thursdays typically tend to be more on the rangy side as the market waits for big reports that will be released on Friday.

EUR/USD Patterns at the End of a Quarter

We stressed this at the end of the 3rd quarter, and I cannot stress this enough – you better know when a quarter ends! At the end of the 3rd quarter we warned you the market would make a big move and it would move the EUR/USD up at least 100 pips, if not more – it did exactly this. At the end of a quarter, the volatility goes through the roof as banks, institutions, hedge funds, and traders square their books, close out trades, take profits, set-up trades for the next quarter, etc. Trillions of dollars are flowing in and out of the market the last day of the quarter and the market goes nuts. 

So far, there has never been a quarter that ended that I did not see the euro win the day. In my trading career, which hasn’t been too terribly long, the euro always finished the quarter by crushing the dollar.

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