Know When the Best Trade Is No Trade at All
There is an old Wall Street adage: “Amateurs trade the opening, and pros trade the close.” Our findings validate that statement and also lend credibility to avoiding periods of higher market volatility.
That old saying about pros trading the close makes intuitive sense to me because I myself have traded based on volume and time distribution. After studying James Dalton’s book, “Mind Over Markets,” for just a short period of time, I learned that trading later in the session was actually better because, by virtue of time, you have more definition to work with.
Several hours into the day’s session, it is much easier to see how price movement is shaping up because you can see which structure—support or resistance—is being respected, as well as which price levels are building value. It is also easier to gauge price behavior relative to the current and previous patterns.
Another reason to avoid trading the first half of the day is because you can avoid most of the news releases. If you trade through a news release, your risk level increases because you do not know the degree to which volatility will spike due to a surprise in either direction.
Markets tend to be less volatile and trade on modest volume when there is no scheduled news ahead, as is often the case in the second half of each day’s trading session. Trend traders in particular know that less volatility and modest or even low volume can be a good thing.
(See this special report from DailyFX quantitative strategist David Rodriquez entitled “When Is the Best Time of Day to Trade Forex?”)
Good Set-ups Come to Traders Who Wait
Our results consistently show that it is better to be taking signals several hours after the market has opened. When trading the Japanese yen (JPY), the most favorable window seems to be after 10 pm EDT (2 am GMT), which happens to be several hours after the Tokyo opening.
The same seems to be true for the euro (EUR). While just after the London open was not a bad time to trade, we were presented with trade set-ups and signals with more favorable risk/reward ratios after 6 pm EDT, which is a full three hours after the London opening.
Likewise, for US stock indices, the most optimal time to be taking signals (when trend trading based on selling rallies in downtrends, or buying dips in uptrends) is after 1 pm EDT. The S&P 500 also showed a tendency to give more favorable signals right around 11 am EDT. That lower risk per trade also showed up consistently when taking trades several hours after the market open.
Another surprise finding is that the majority of our winning trades were taken during low-volume periods. When volume is low, it means trade is not being facilitated, which means price is not being accepted at those levels. That is a harbinger of a market reversal, and a viable trade signal that we are looking for.
Studying the markets in this manner and adapting to be sure you’re trading when the markets best suit your strategy—and being flat when they don’t—can make all the difference to your consistency and bottom-line results.
By Jay Norris, author, The Secret to Trading: Risk Tolerance Threshold Theory
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.