Forex Trading Articles - Forex Cheat Sheet

Sshhh – It's Time To Discuss The Forex Cheat Sheet

Jan 13 • Forex Trading Articles • 1299 Views • No Comments

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Occasionally you’ll get a ‘heads up’ in the form of a fascinating document sent to you by contacts in the industry. Some really are eye-openers, others are ‘slap on the forehead’ “why didn’t I see that?” obvious…

Positioned somewhere in the middle of those two descriptions is a document called the forex cheat sheet. The document doesn’t list a series of strategies, or offer up advice on how to ‘cheat the market’, principally it lists the crucial times to trade and expands on the reasons why.

Let’s not forget that despite algorithms driving the equities markets, replicating ‘bot trading’ is more difficult in a market as liquid as forex. Forex as an industry is still prone to human intervention and the whims of that human behaviour and as such forex is (arguably) a ‘cleaner’, more arithmetically pure market place in which to operate.

You’re probably not alone in wondering if the all the main market movers and contributors have gone for tacos at certain times of the day, or in realising that when the City of London starts work at 7-8 AM GMT, the market moves. Similarly how many of us have witnessed sleepy Monday mornings in the market and wondered what kind of a weekend of indulgence many of the major market players have had and if they’ve woken up yet, to witness that sleepy Monday extending to the afternoon session as New York opens?

How many of us have been whipsawed, or got direction wrong on a Monday which could in fact be due to lack of market participation giving out false signals? There also appears to be an acceleration of activity mid week and a slowing down on a Friday, in the UK this Friday phenomena is often jokingly referred to as P.O.E.T.S. day.. Pi** Off Early Tomorrow is Saturday and that slow down of human interaction exists in many commercial workplaces. In short many repeating patterns in the market place are undoubtedly due to human behaviour…

Irrespective of “why” there is definitive proof that trading patterns of “when” (as opposed to why) have evolved over the past decade or so. Naturally we all concentrate on reasons why a currency would move; fundamental macro economic issues, policy decisions, data releases and whilst these factors determine values and price there is undeniable proof that because of or despite these factors price is still more likely to move in the parameters you’ll now see listed. Using the following data will undoubtedly assist traders in picking the best times to trade and therefore help increase the probability of identifying high probability set ups.

Imagine that for each currency pair, you already know:

  • When trends are most likely to occur
  • The best days to trade
  • The most active trading days
  • The best hours to trade
  • The most active trading hours of the day
  • How far price is likely to move during a trend
  • How much of that move you can reasonably expect to capture
  • How long a trend is likely to last


We’ll concentrate on one currency pair, cable (gbp/usd) to test the theories.

According to the research, 96% of the pair’s trends occur between Monday and Friday, with 15% starting on Monday, 19% on Tuesday, 13% on Wednesday, 31% on Thursday, and 18% on Friday which produces three to four times fewer trends than the other days.

Thursday is the most active trend-producing day for this pair, twice the action of the other weekdays. Friday is a good day for trends to begin, but it has the weekend and the Sunday open to contend with. If you are a more aggressive trader, you will probably hold these trades through the weekend. If you’re more conservative, you’ll exit either on Thursday’s or Friday’s close.

What are the best times to trade a given currency pair?
Research and analysis reveals that 81% of GBP/USD’s trends occur between 1:00 AM EST and 13:00 PM EST. What’s more, 29% of the trends begin between 1:00 and 5:00, 39% begin between 5:00 and 9:00, and 13% between 9:00 and 13:00. The most active time in terms of trends beginning is four-hour period between 5:00 and 9:00.

On the other hand, while trends do begin during the four-hour periods starting at 13:00, 17:00, and 21:00, they don’t develop as often during those times. In fact, 13:00 is the time that trends are least likely to occur in GBP/USD.

You now have two dynamic pieces of ‘when’ information about GBP/USD: you know the best trading days and the best trading hours. In fact, you know that the very best day to trade GBP/USD is Thursday, and the best hour on Thursday to trade is 5:00 AM EST.

Not only that, but if you combine the 1:00, 5:00, and 9:00 frequency figures, you can see that you have a good chance of getting into a trending trade on Monday through Friday, with the greatest probability for a winning trade on Thursday.

 

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How long can I expect a trend to last?
Research reveals that with the 4-hour time frame, GBP/USD trends can be anywhere between 3 and 44 bars in length, the median trend length is 11 bars, 86% of the trends are between 3 and 17 bars long before there is a retracement. 74% of the trends will be between 6 and 17 bars long before retracement. The majority of trends (48%) run from 6 to 11 bars before retracement.

The Trend Length gives you a general idea of how long trends last before there is a retracement for GBP/USD run on the 4-hour bars, however, research allows us to be much more specific. For example, if a trend begins at 5:00 AM US EST on a Thursday, you can expect the trend to run about 17 bars before there is a retracement.

How many pips can I expect price to move during a trend?
It is almost impossible to capture 100% of a price move. Various factors influence the pips you can bank. Where in a trend’s cycle you enter the market, incorrectly set stop losses, and short-term adverse moves that stop you out but don’t affect overall market direction all affect the pips retained. The total amount price moves and the amount of that move that you bank are two different issues. We have learned that Monday through Thursday produce the most pips, with Thursday producing the greatest gains on average.

How much of a pip move can I reasonably expect to capture?
Analysis of the data over hundreds of trends reveals you can reasonably expect to capture about 75% to 85% of the pips in a trend, depending on such factors as; early versus later entry, risk tolerance, stop loss strategies, and minor correctional moves that trigger stop losses.

Summary

  • Monday through Thursday are the optimal trading days
  • Thursday is GBP/USD’s most active day
  • The best hours to trade GBP/USD are between 1:00 AM EST and 13:00 PM EST
  • 5:00 AM EST to 9:00 AM is the most active trading time
  • 74% of trends run between 6 and 17 bars in length before a retracement
  • The median length of a GBP/USD trend is 11 bars before a retracement
  • Trends length varies with the day of the week and the hour of the day the trend begins
  • 75% of price moves are between 50 and 150 pips; 43% are between 100 and 150 pip
  • We can expect to capture between 94 and 125 of the overall pips in a trend, depending on the trading day.


So where do we go with this information, how do we embed it into our trading strategy given it sits outside our standard 3M edge – Method, Mind, Money Management? Perhaps the contrary view is correct, we often use the phrase, “being out of the market is in fact a position”, is our decision not to trade at certain days and or times actually a fundamental constituent part of each of the 3 Ms? Think how, in terms of MM and Mind, your trading may improve if you decide (whatever signals you receive) you will never enter a swing trade unless the set up occurs from Wednesdays onwards.

Your MM may improve and you may feel more relaxed once and if you’ve decided to trade only three days a week. You may have noticed that when trading on smaller time frames, the probability of better and more profitable set-ups occurring increases when New York opens, and on Wednesday and Thursday. Taking that a stage further would you be more refreshed and your trader psyche be ‘in a better place’ if you only traded the sessions which historically have a proven chance of success?

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