- 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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Exploiting the Volume Profile
In the last article in the series, we discussed robust trading ideas, comparing moving averages with a channel breakout strategy, showing how the latter is of much greater value and how using a moving average system may show great results in back testing but can be fatally flawed in actual trading.
The channel breakout strategy, while having less impressive performance statistics during ‘in sample’ testing, showed robust performance over time, with the same parameters providing a robust edge, over time.
The reason that channel breakout systems have stood the test of time is likely because markets trend in the long term and a new multi-month high is always going to have much more psychological significance than the crossing of two arbitrary moving averages. The findings strongly support the argument that any system based on predictable market behaviour, is likely to be much more robust than one based on arbitrary mathematical algorithms.
Therefore, in this article we are going to explore another exploitable aspect of predictable behaviour in the markets, which is much shorter term in nature; namely when traders start and end their trading day. This has been exploited in the futures markets with strategies such as the opening range breakout.
Volume and Time of Day
Monroe Trout, who famously made billions out of systematic trading, made some interesting observations about the futures markets when asked about the most liquid times of day, in his interview in ‘The New Market Wizard’ by Jack Schwager.
“The most liquid period is the opening. Liquidity starts falling off pretty quickly after the opening. The second most liquid time of day is the close. Trading volume typically forms a U-shaped curve throughout the day… Generally speaking those patterns hold in almost every market. It’s actually pretty amazing.”