Tuesday, 26 July 2011

Trading Zones

The market behaves differently at different times of the day. It's not the time of the day that has the impact, but the relationship of a particular market to other markets or regular events.

For example, the currencies react to the handing of the FX books around the world from trading desk to trading desk. The world's day begins in Far East/Australia. When the new guys come in, the U.S. desk hands over their FX book to them. The new desk then reacts to news that comes out and their assessment of the late U.S. news. They trade the day until London opens when they hand the book to the English/European guys. These guys do just what the Far Eastern guys did. They assess the news and react to it in adjusting their book. When New York opens again, the process is repeated.

In each of these three time zones we have a lot of activity when the time zone opens and the market has to come into balance. Then there is a period of normal market activity and another flurry into the close of the time zone to balance the book, so it can be handed on to the next time zone. So there are usually three different types of activity in each time zone.

Looking at this practically, I need to trade differently at different times of the day. When I start a about 6am London time, I usually have a good trade coming in the DAX if I see that the ES has moved away from the U.S. close.

What it also means is that I can benefit from this behaviour by setting Flo up differently for each of these time periods. I can do this by having Flo back test each distinct time period separately. I can also map my discretionary trading to meet these vary same time zones.

Today started very quietly but there was a classical VAL/VAH trade available in the Dow EuroStoxx50. The market opened right on yesterday's VAL and drifted up to the VAH. It's a matter of developing a number of pictures in your TP and rolling out the trade that fits. The MarketDelta chart below shows the trade. The timing was easy in this case, as it was the open, but often you need to look at the Volume Breakdown or the Inside the Bar stuff or the momentum asserting itself at the coincidence of the VAL.

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