- Exploiting Order Flow for the Discretionary Quant - Part 1
- Exploiting Order Flow for the Discretionary Quant - Part 2
- Simple Mechanical Trend Following in the Forex Market
- Is a Reward to Risk Ratio Inherently Better Than Another?
- Robots Aren’t What They’re Cracked Up To Be
- Creating a Trading System Using Neural Networks
- Function Based Trailing Stop Mechanisms
- The Seven Deadly Sins of Automated Trading
- Exploiting the Volume Profile
- Building Robust FX Trading Systems
- Know Your Currencies
- Automating FX Trading Strategies
- Grammatical evolution
- Identifying an Edge
- Interview with Salvatore Sivieri
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In both cases, we can see a very similar pattern emerging. Aggregating the results shows the distribution much more clearly:
Just as Monroe Trout observed for the futures markets, although the foreign exchange markets have no fixed open, nor close and are traded twenty-four hours a day, they too follow a very predictable pattern every day.
When the aggregated volume across all currency pairs is plotted as a single graph, we can clearly see three distinct, ascending peaks of volume as first Asia and then Continental Europe, London and then the US trading sessions start. Many surveys have been done to determine the major turnover for foreign exchange by trading centre, most notably the Triennial Survey from the Bank of International Settlements, last published in 2007.
Therefore, we know that the three largest trading centres are London, Continental Europe and then the US. It’s therefore not surprising to see that the largest volume of the day is during those few hours between 1pm and 4pm, during the London afternoon when the three trading centres are active. This even holds true for major Asian currencies such as the Japanese Yen that are not natively active during that time.
Exploitation of Volume
It is a very well proven and accepted principle of trading that volume confirms a trend. If one was locked in room, without access to any news and was only able to see price and volume, any major event would be reflected in that information. If there was a sudden move but little volume then it’s unlikely that move was genuine. If however, an event such as 9/11 occurred, one would have seen both a large range in the price as well as a significant increase in trading volume. This type of volume confirmation allows a trader to know whether a move is of genuine significance.
This is one of the edges I enjoyed as a trader, while sitting on the foreign exchange desk at a major investment bank. We could physically see the customer flow going through and literally felt it, with the increase in noise. Whether consciously or not, a trader at a major investment bank cannot help but be aware of an increase in trading volume, just as a trader on the floor of an exchange is similarly aware.
It is actually almost impossible not to be aware of the interest building in a certain currency pair and this is something that almost certainly contributes to what traders often refer to as their feel, or gut instinct. It’s also likely the reason why so many traders find the transition from a bank’s dealing room to trading successfully outside it, to be so difficult.
One of the major challenges for an FX trader, outside a bank’s dealing room, is that actual traded volume is not available in real-time across such a fragmented market, so it is very difficult to know when the volume is increasing. However, what the FX trader does know, is that any move occurring between 1pm and 4pm is very likely taking place on increasing volume, at the highest volume time of day. Therefore going with a move during those few hours is likely to provide a significant edge, over time.