Know Your Currencies

currency volatility liquidity interest rates

In the last article we looked at the commonality of volume distribution and ranges across currency pairs.  We examined how similar they are throughout the 24 hour trading day, with even currencies such as the Australian Dollar and Japanese Yen having the largest volumes and hourly ranges during the London afternoon, when the three major trading centres of Europe, London and the US are all active, as opposed to their own native time zones.

Having explored the commonality, this article now explores the key differences between each currency pair, which can be broadly categorized into: time zones, liquidity, volatility and interest rates. 

An understanding of these differences, that give each currency pair its unique characteristics, is important in determining whether using different parameters is ‘curve fitting’ or genuinely taking account of the unique and quantifiable characteristics of each market. 

If the data during a back test was trending, then different parameters will likely appear to be better than a currency pair that was moving sideways during the test period.  However, that is no indication that the currency pairs will continue trending, or moving sideways in real trading, so a good understanding of why a system works is vital, if it’s going to be robust and continue to work in the future.

All times are expressed in local London time, unless stated otherwise.

Time Zones

We know that the London afternoon has the largest ranges and volumes for all currency pairs; however, we also know that news events and economic data affecting a certain currency will almost always occur during that currency’s native time zone. 

We also know that currencies are traded in pairs, so a move in GBPJPY at 2am is more likely to be a Yen move and a move at 10am is more likely to be a Sterling move.