FX Tango

A Journey to Master Forex Trading (FX Trader from Singapore)

Showing posts with label Time Frames. Show all posts
Showing posts with label Time Frames. Show all posts

Thursday, December 4, 2008

Market Hours

Market Hours

So far, all the lessons we have taught you deal with “how” to trade the forex market. But another important lesson that you need to learn is “when” to trade the forex market.

Yes, it is true that the forex is open 24 hours a day, but that doesn’t mean it’s always active the whole day. You can make money in the forex when the market moves up, and you can even make money when the market moves down. However, you will have a very difficult time trying to make money when the market doesn’t move at all. This lesson will help determine when the best times of the day are to trade.

Market Hours

Before looking at the best times to trade, we must look at what a 24hr. day in the forex world looks like. The forex can be broken up into three major trading sessions: the Tokyo Session, the London Session, and the U.S. Session. Below is a table of the open and close times for each session:

Market Hours

You can see that in between each session there is a period of time where two sessions are open at the same time. From 3-4 a.m. EST, both the Tokyo and London markets are open, and from 8-12 p.m. EST, both the London and U.S. markets are open. Naturally, these are the busiest times during the market because there is more volume when two markets are open at the same time.

More Market Hours

As you can see, the London session usually shows the most movement.

Now let's see which days of the week are best for trading...

Best Days of the Week to Trade

Best Days of the Week to Trade Forex

Ok, so now we know that the London session is the busiest out of all the other sessions, but there are also certain days in the week where all the markets tend to show more movement. Below is a chart of average pip range for the 4 major pairs for each day of the week:

Best Days of the Week to Trade

You can see that during the middle of the week is where the most movement is seen on all 4 major pairs. Fridays are usually busy until 12pm EST and then the market pretty much drops dead until it closes at 5pm EST. This means we only work half-days on Fridays. The weekend always starts early! Yippee!

So based on these three simple pieces, we’ve learned when the busiest times of the market are. These are the best times to trade because they give us a higher chance of success.

If you're feeling down in the dumps and wish to lose money, these are the times to trade...

When to Trade if You Want to Lose Money

Here at BabyPips.com, we don’t like to force our opinions on you. Instead, we want you to make your own decisions when it comes to your own trading. If you really do not want to trade during the busier times of the market when trade volume and pip movement is highest and where you will make money easier, then by all means, feel free to trade on these times mentioned below. We guarantee you’ll have a more difficult time trading!

Fridays: Fridays are very unpredictable. This is a good day to trade if you want to lose all the profit you made during the rest of the week.

Sundays: There is very little movement on these days. Trade this day if you want to start off your week with NEGATIVE pips.

Holidays: Banks are closed which means very little volume for whatever country is having the holiday. Holidays are great to trade when you would rather lose your money than take a day off and enjoy the other finer things in life.

News Reports: No one really knows where the price will go when a news report comes out. You could lose a fortune trading during news releases if you don't know what you're doing. Price acts like a drunken monkey during these times and become unpredictable.

Can't Trade During Busy Market Hours?

What to do if you can’t trade during the busy market hours

If you live in a crappy time zone or you have a day job, then you probably can’t sit in front of a computer during the busy market hours. If this describes you, then I have a few solutions for you:

  • Move to a better time zone. Move to London preferably. Sure you’d have to pack up and start a whole new life, but hey, at least you can trade right?
  • Trade at work (be sure you have some “real” work ready just in case your boss sneaks up behind you and asks what you’re working on). I also recommed you master the ALT-TAB key combination (if you use Windows) so you can quickly switch windows at a moment's notice. This option can be the ultimate perk because your employer is basically paying you while you trade forex. Gettin' paid while gettin' paid if you know what I'm sayin'.
  • Become a swing or position trader. As a swing/position trader, you won’t have to constantly monitor the markets and you can check or look at them when you get off work.
  • Trade a different session even if it’s not the busiest one. If you can’t trade the London or U.S. session, then trade the Tokyo session. However, you should be disciplined and trade it every day. You will start to learn how it moves and can develop strategies that are specific to that session.

We think 3 and 4 are your best options, but again, the choice is up to you.

Even if you can’t trade, it’s good to watch the charts for a full session. By getting use to seeing the price movement in action, you can actually see the real story of the currency. Watching the charts live is very different then looking at past charts.

Even if you can’t actually trade the market, make mental notes of when you would take trades while you’re watching the charts live. Practice makes perfect, and the more you do it, the better you’ll get at it.

The Choice Is Yours

There you have it! We’ve given you all the information you need regarding when the best times to trade are. All you have to do now is decide whether or not you would rather trade when it’s easier to make money, or if you’d rather do it the hard way.

Summary

Busiest/Best times to trade:
  • When 2 sessions are overlapping: 3-4am EST and 8am-12pm EST
  • The London session is the busiest out of the other two.
  • The middle of the week typically shows the most movement.
Worst times to trade:
  • Fridays
  • Sundays
  • Holidays
  • News Events
  • During Desperate Housewives or American Idol episodes
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Multiple Timeframes

Which Timeframe Should I Trade?

Welcome back to school freshman! As part of your initiation to high school you must pay BabyPips.com $1 million dollars so that we can sit in a mansion in St. Thomas and sip Mai Tais all day, MWUHAHAHA! (There’s that evil laugh again).

But seriously, you can send it to our Paypal account. We ’ll be waiting for it. Seriously. No joke. We're not kidding. What? You thought this stuff was free? Wait a minute..this stuff is free…. Sigh, nevermind. Okay back to work...

Which Timeframe Should You Trade?

One of the main reasons traders don’t do well as they should is because they’re usually trading the wrong timeframe for their personality. New traders will want to learn how to get rich quick so they’ll start trading small timeframes like the 1-minute or 5-minute charts. Then they end up getting frustrated when they trade because it’s the wrong timeframe for their personality.

Finally after a long period of timeframe unfaithfulness, we felt we were most comfortable trading the 1-hour charts. This timeframe is longer, but not too long, and trade signals were fewer, but not too few. We now have more time to analyze the market and didn’t feel rushed anymore.

On the other hand, we have a friend who could never, ever, trade in a 1-hour timeframe. It would be way too slow for him and he’d probably think he was going to rot and die before he could get in a trade. He prefers trading a 10-minute chart. It still gives him enough time (but not too much) to make decisions based on his trading plan.

Another buddy of ours can’t figure out how we can trade a 1-hour chart because he thinks it’s too fast! He trades only daily, weekly, and monthly charts. His name is Warren Buffet. You might know him.

Okay, so you’re probably asking what the right timeframe is for you. Well, buddy, if you had been paying attention, it depends on your personality. You have to feel comfortable with the timeframe you’re trading in.

You’ll always feel some kind of pressure or sense of frustration when you’re in a trade because real money is involved. But you shouldn’t feel that the reason for the pressure is because things are happening so fast that you find it difficult to make decisions or so slowly that you get frustrated.

When we first started trading, we couldn’t stick to a timeframe. We started with the 15-minute chart. Then the 5-minute chart. Then we tried the 1-hour chart, the daily chart, and 4-hour chart.

Trading timeframes are usually categorized into three types:

  1. Long-term
  2. Short-term or swing
  3. Intraday or day-trading

Which one is better? It depends on....

Timeframe Breakdowns

Which one is better?

It depends on your personality!

Let me give you a breakdown of the three to help you choose:

Timeframe
Description
Advantages
Disadvantages
Long-term

Long-term traders will usually refer to daily and weekly charts. The weekly charts will establish the longer term perspective and assist in placing entries in the shorter term daily. Trades usually from a few weeks to many months, sometimes years.

Don’t have to watch markets intraday

Fewer transactions means less paying of spreads

Large swings which require large stops

Usually 1 or 2 good trades a year so patience is required

Bigger account needed to ride longer term swings

Frequent losing months
Short-term

Short-term traders use hourly time frames and hold trades for several hours to a week.

More opportunities for trades

Less chance of losing months

Less reliance on one or two trades a year to make money

Transaction costs will be higher (more spreads to pay)

Overnight risk becomes a factor
Intraday

Intraday traders use minute charts such as 1-minute or 5-minute.

Trades are held intraday and exited by market close.

Lots of trading opportunities

Less chance of losing months

No overnight risk

Transaction costs will be much higher (more spreads to pay)

Mentally more difficult due to frequency of trading

Profits are limited by needing to exit at the end of the day.

You have to decide what the correct timeframe is for YOU.

You also have to consider the amount of capital you have to trade. Shorter timeframes allows you to make better use of margin and have tighter stop losses. Larger timeframes require a bigger account so you can handle the market swings without facing a margin call.

When you finally decide on your preferred timeframe is when the fun begins. This is when you start looking at multiple timeframes to help you analyze the market.

’Long or Short?’

If you ever look at a currency pair on different timeframes, you probably noticed that markets can move in different directions at the same time. A moving average may rise on a weekly chart, giving a buy signal, but fall on a daily chart, giving a sell signal. It may rally on an hourly chart, telling us to go long, but sink on a 10 minute chart, telling us to short. What the hell is going on?

Let’s play a quick game called “Long or Short”. The rules of the game are easy. You look at a chart and you decide whether to go long or short. Easy. Okay ready?

5 Minute Chart

Let’s a take a look at a EUR/USD 5-minute chart on 11/03/05 around 4 am EST. Oooh it’s so nice. It’s trading above its 100 simple moving average which is bullish and look! It just broke out and closed above it’s previous resistance! Perfect time to go long right? I’ll take that as a yes.

Multipe Timeframe Chart - 5 minute

Oh! You are WRONG! Look what happens next! It’s goes up a little bit but then drops like rock. Oh too bad.

Multipe Timeframe Chart - 5 minute

60 Minute Chart

Let’s look at the same exact chart on a higher timeframe. It’s the same date, 11/03/05 and the same time, around 4 am EST.

Holy cow! The pair broke out of its down channel which is bullish. It’s trading above its 100 simple moving average which is bullish. The last candle broke and closed above its previous resistance which is bullish. Looks like a bull, smells like a bull. Nothing but up from here right? You say long.

Multipe Timeframe Chart - 60 minute

OOOHHHHH! Zero for two! How do you like your steak cooked? Because from the looks of this chart…the bull got slaughtered. The pair even dropped back into its old down channel. Look at that last candle, it was dropping so much, it couldn’t even stay inside my chart! Amazing!

Multipe Timeframe Chart - 60 minute

4 Hour Chart

Okay, we’ve now moved up to an even higher timeframe chart. A 4-hour chart. It’s still the same date and time, just a higher timeframe. If you had looked at this chart first, would you still have been quick to go long on either the 5-minute or 1-hour chart?

It’s currently trading in a down channel which is bearish. The pair is hitting the upper trend line of the down channel which is extremely bearish. Yes, it’s still trading above the 100 simple moving average which would count as bullish, but that channel would still make me cautious. Especially since it’s trading around the upper trend line.

Look what happens! Droppin’ like its hot! The pair stayed true to its channel. It hit the upper trend line and traveled down.

Daily Chart

For fun’s sake, let’s go up one more timeframe to the daily chart.

Wow, will you look at that? The pair is trading in an obvious down trend. It’s below its 100 simple moving average and its in a down channel. On this chart, the trend direction is so obvious! Do you also notice the last candle? It tested the upper trend line and reversed. Not a very good bullish sign. Let’s look at what happens next.

Hallelujah! The downtrend continues!

So what's the point?

All of the charts were showing the same date and time. They were just different timeframes. Do you see now the importance of looking at multiple timeframes?

We used to just trade off 15-minute charts and that was it. We could never understand why when everything looked good the market would suddenly stall or reverse. It never crossed our minds to take a look at a larger time frame to see what was happening. When the market did stall or reverse on my 15-minute chart, it was often because it had hit support or resistance on a larger time frame.

It took me a couple of hundred bucks to learn that the larger the timeframe, the more important support and resistance levels were. Trading using multiple time frames has probably made us more money than any other one thing alone. It will allow you to stay in a trade longer because you’re able to identify where you are relative to the big picture.

Most beginners look at only one timeframe. They grab a single timeframe, apply their indicators and ignore other timeframes. The problem is that a new trend, coming from another timeframe, often hurts traders who don’t look at the big picture.

Take a broad look at what’s happening. Don’t try to get your face closer to the market, but push yourself further away.

Select your preferred timeframe and then go up to the next higher timeframe. There you make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred timeframe to make tactical decisions about where to enter and exit (place stop and profit target). Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who trade off on only one timeframe.

There is obviously a limit to how many timeframes you can study. You don’t want a screen full of charts telling you different things. Use at least two, but not more than three timeframes because adding more will just confuse the geewillikers out of you and you’ll suffer from paralysis analysis and go crazy.

We like to use three time frames. The largest time frame we consider our main trend, the next time frame down as my medium trend and the smallest time frame as the short-term trend.

You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement. You might use:

  • 1 minute, 5 minute, and 30 minute
  • 5 minute, 30 minute, and 4 hour
  • 15 minute, 1 hour, and 4 hour
  • 1 hour, 4 hour, and daily
  • 4 hour, daily, and weekly and so on.

When you’re trying to decide how much time in between charts, just make sure there is enough difference for the smaller time frame to move back and forth without every move reflecting in the larger time frame. If the timeframes are too close, you won’t be able to tell the difference which would be pretty useless.

Summary

  • You have to decide what the correct timeframe is for YOU.
  • Once you've found your preferred timeframe, go up to the next higher timeframe. There you make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred timeframe to make tactical decisions about where to enter and exit (place stop and profit target).
  • Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who only trade off on only one timeframe.
  • Make it a habit to look at multiple timeframes when trading.
  • Choose a set of time frames that you are going to watch, and only concentrate on those time frames. Pick three time frames: 1hr, 4hr, daily; 5 min, 15min, 1hr, and so on. And only use those time frames. Learn all you can about how the market works during those time frames.
  • Don't look at too many time frames, you’ll be overloaded with too much information and your brain will explode.
  • Stick to two or three timeframes, any more than that is overkill.
  • We can't repeat this enough: Get a bird's eye view. Using multiple timeframes resolves contradictions between indicators and timeframes. Always begin your market analysis by stepping back from the markets and looking at the big picture.
  • Use a long-term chart to find the trend, and then return closer to the market to make decisions about entries and exits.
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