Forex on Five Hours a Week: How to Make Money Trading on Your Own Time _5 ppt

It’s a choice you can make,and heck, if you live outside the United States these may very well be yourregular trading hours, but for most traders in the United States it’s a fright-ening

C H A P T E R 7

Around the World

Effective order entry will allow you to walk away!

2006 “Fxstreet.com The Forex Market.” All Rights Reserved

Let’s preface this next discussion with the fact that many of us have

attended one of the many traveling shows that come to our town ing to us about forex trading and the wonderful world of this 24-hourmarket If you are expecting me to bash these, I’m not If you were intro-duced to this market by some such presentation, well then, that was worthyour time and you had the knowledge to go out and seek more knowl-edge, which no matter who it comes from, can be a valuable gift—if youknow what to do with it If you bought the course, software, book, DVD,

talk-73

whatever, I’m quite certain no one put a gun to your head So let’s move on.It’s a fresh start.

Two of the most compelling features of the forex and the ones mosttouted are the 24-hour trading time of the foreign exchange and the factthat it is the largest market in the world Both in fact are true but exagger-ated How about the fact that there is always a bullish market in the forex?Also true, but you need to find the pair that is trending higher

If you were to ask me what the biggest misconception most tradershave about this market, the one thing that is completely overused and mis-

understood, it’s that this market trades 24 hours a day Now what a minute, Raghee, you just said that was true!And you’re right, I did But let’s clarifyright now—all 24 hours are not created equal

WHO’S AWAKE?

This is the first question to ask before you put on a trade, before you gin your analysis, and is a key to understanding follow-through and orderentry

be-This was not necessarily a common train of thought for those of youwho are making the transition to the forex market from the futures or stockmarket as I did back around 1999–2000 We knew when the market openedand closed; heck, they rang a bell to let us know! We knew what was anilliquid pre- and post-market, and we know when most of the volume oc-curred For those of you not making this transition, you were wide-eyedlistening to the speaker explain how you could come home, hit a few keys,look at the market, and execute your trades before heading off to work orafter dinner Well, it’s not untrue, but it’s not the whole story either.I’m sure you’ve heard about your buddy or a friend of a friend who gets

up at 2A.M EST to trade the markets as Europe and the U.K begin trading.And now you’re thinking 2 A.M.? I can’t get up at 2 A.M.! Well, here’s theskinny I don’t, and you don’t have to either It’s a choice you can make,and heck, if you live outside the United States these may very well be yourregular trading hours, but for most traders in the United States it’s a fright-eningly early part of the morning reserved for new parents whose newbornstill doesn’t sleep through the night

By the way, I have received many e-mails from new parents who havesaid that getting up with their baby is a great way to trade the forex All Isay to that is you can never start teaching your kids about the markets tooearly!

“Who’s awake?” is the rule by which you will govern your trading tivities Just because a trading time is convenient doesn’t make it effective.One financial center is not necessarily equal to another in importance or

ac-size These are the financial centers that I keep on my desktop I use aprogram called the World Tick Time Zone Clock It’s about $20 last time Ichecked, and it allows me to put multiple, floating clocks on my desktop.You can go to www.thirtydaysoftrading.com to download a free trial that

is set to my specifications You don’t need this if you have another programthat will do it for you, and it’s certainly easier and cheaper than runningout and buying six clocks

When you sit down to trade, you must ask yourself which of the lowing six financial centers is open for the trading day Let’s first definewhat “trading day” is because it’s how you will know when the active part

fol-of the work day is in each city you track People are people If you’ve doneany amount of traveling, this becomes clear No matter where you go weare all actually very similar in our habits and beliefs The workday is nodifferent People in Tokyo more or less start work at 7A.M to 8 A.M andwind down their day between 5P.M and 6 P.M This is no different in NewYork, London, Frankfurt, Hong Kong, Singapore, or Sydney And not toocoincidentally, those are the main financial centers I keep track of

So when you are sitting down at your computer, before you even beginanalyzing any chart, you must know who is up and trading the markets.Which financial center or centers are active, which are going to be active,which are getting ready to call it a day? If the markets are open 24 hours,

we know that there are shifts from one country to another as they begintheir work day This shift must be accounted for In fact, one of my opening

range strategies looks to capitalize on this opening While the forex market

does not close, humans in a sense do We go home, eat, and sleep Opening,lunch time, and closing time are worldwide, city-by-city realities we mustacknowledge

Let’s break down each financial center and get an idea of who is movingthe market and when

FINANCIAL CENTERS YOU NEED

TO KNOW

Beginning with Sydney, as it is the first new look at the coming day, theforex market “opens” with the country of Australia, and so we focus on itsimportance as the initial opinion of the day It’s not the largest financialcenter by any means, but the first look of the day should not be ignored.Sunday afternoon New York time is the first look most traders have at thecoming week, and brokerages in the United States open and allow traders

to enter trades Now I cannot account for the many brokerages around theworld, but Sydney still represents the beginning of a brand new week nomatter where you live So starting with Sydney we move on to Tokyo

Once Tokyo opens, you have a more significant Asian open, and thisalso creates the first market overlap This means you have two major fi-nancial centers open and trading at the same time Remember the onlyreason the forex market is a 24-hour market is that as one financial centercloses you have another opening or preparing to open, and this accountsfor the 24-hour liquidity This concept of market overlap is a very impor-tant one because participation of multiple financial centers is what makesthe trading during those hours more liquid and also more significant Themore people that are awake and trading during certain hours, the better itreflects a broader market psychology.

Once Tokyo opens or more accurately put, becomes active, one hour

after Sydney, there is only Hong Kong and Singapore left to complete a fullrepresentation of the Asian session Hong Kong and Singapore are in thesame time zone, but both represent major financial centers, so I mentionboth Realize that it takes just two hours for the Asian session to go intofull swing once Sydney opens But, alas, the Asian session currently onlyaccounts for approximately 10 percent of daily turnover and thus does noteven come close to being a major reflection of the trading day that is still

to come

I have to say that as I am on the east coast of the United States, I think

in east coast time I am however going to mention that most of the timeyou will see time represented in Greenwich Mean Time (GMT) when youlook at most forex tools and sites And that’s fine just as long as you realizethat GMT is basically London time and London trading hours are the mostimportant in the forex universe In fact, London is the 800 pound gorillaamong the financial centers GMT is also commonly referred to as UTC orUniversal Coordinated Time Regardless of what it is called, GMT gets itsname from the solar time at the Royal Observatory in Greenwich, London

So don’t worry when you see GMT, just think London London is one hourbehind Frankfurt and five hours ahead of New York

London is the financial capital of the world to many Sure Chicago isthe center of the commodities world and certainly New York is the center

of the equities world, but to forex traders, the European and U.K session,represented by Frankfurt and London, are the most important And yet Itell you that you don’t have to get up and trade with these giants Let meexplain

PRIME TIME!

Prime time is the overlap between Frankfurt, London, and New York Itoccurs between the hours of 7A.M EST (early) and 1 P.M EST (late) Thatrepresents noon to 6P.M EST in London.

Now to give an idea of why these five hours are the meat and toes of the forex trading day I have to get into which pairs are by far themost actively traded I’ll preface this discussion by saying that this doesnot reflect the fact that I live in the United States It reflects trading ac-tivity and trading activity alone Not my trading activity, but the vast ma-jority of traders around the world According to the Bank of InternationalSettlements, the most actively traded pairs are the EUR/USD (“fiber”), theUSD/JPY (“dollar-yen”) and the GBP/USD (“cable”) The next three pairsround out the top six most actively traded pairs: the USD/CHF (“swissy”),AUD/USD (“aussie”), and the USD/CAD (“loonie” or “canada”).

pota-By the way, as I mentioned earlier, traders shorten everything and give

it a nickname Apparently we can’t help it So to keep you from soundinglike a complete “noob” (that’s short for newbie or rank beginner) let mebring you in on trader-speak Right off the bat, if you are referring to anypair that trades 1.xxxx, just drop the “1” when you are talking about it Sowhen you are telling someone about the EUR/USD trading at 1.2765, you’lljust say “the fiber is trading at 2765.” Got it? Now, of course, when youare placing a trade, say it properly Full quotes only! Every pair seems tohave a nickname and some have more than one You’ll hear the familiar

“greenback” nickname for the U.S dollar The greenback nickname comesfrom when U.S Demand Notes created by Abraham Lincoln to finance theCivil War were printed in black and green on the back side: greenback Thepound sterling—not the pair but the pound sterling itself—is referred to as

“quid” named so from the Royal Mint in Quidhampton or the Latin “quidpro quo” meaning “what for what” as an exchange of goods for currency.Either way, “quid” it is The “loonie” can mean the U.S dollar/Canadiandollar pair or the Canadian dollar itself It comes from the picture of a loon

on the back side of a one dollar coin The name “loonie” is so well known

as reference of Canadian currency that the Royal Canadian Mint secured

the rights to the name loonie The “cable,” which is the nickname for the

GBP/USD comes from the Transatlantic Cable laid in mid-1800s that linkedthe United States and the United Kingdom by telegraph Through this un-derwater cable, currency prices would be sent between New York andLondon The nickname for the EUR/USD, “fiber” is a little more difficult topinpoint First of all, it’s not that commonly used, but I personally think it is

a good habit not to call the EUR/USD the “euro” as a nickname for the rency since there is actually a “euro” currency and this can be confused forthe single currency versus reference to the pair The “fiber” comes I think

cur-in part from “fiber optic cable” cur-in much the same vecur-in as the GBP/USD iscalled the cable, and also in part from the security thread that is woveninto the center of a euro note, or perhaps and more likely is the fact thatthe paper for the euro banknote is 100 percent pure cotton fiber There youhave it, two good and one very obvious reason to refer to the EUR/USD as

the fiber You got your nickname background, now go use ’em!

So if you look back over the six most traded pairs, there should be oneobvious common factor they all share Know it? Yep, that’s the U.S dollar.They all traded against the U.S dollar So the focus on the prime time from

7A.M to 1P.M EST has nothing to do with when I want to trade or when it

is convenient to trade but rather the all-important market overlap betweenFrankfurt, London, and New York Once New York enters the picture youhave U.S participation in the markets, and that is where you will see themost impactful dollar trading events and opinion

If you live in Europe or the United Kingdom, then there’s certainly noreason you can’t trade the major pairs and cross rates I mean of courseyou can! You don’t need me to tell you that But keep in mind that U.S.economic releases and the U.S Dollar Index futures will impact the pairsonce New York gets active between 7A.M and 8A.M EST and of course beaware of 8:30A.M EST economic data releases as well as 10 A.M EST asthese are the two most common scheduled release times

Cross-rates or pairs that don’t trade against the dollar are certainly able alternatives when the U.S market is not open, but let me say that theseare not always liquid pairs “Liquid” is just another way of saying good vol-ume Good volume means there is plenty of trading in a market, whichfacilitates getting in and out with ease and a tight bid/ask pip spread If Iask you, “What’s the spread?” I am essentially asking you what the differ-ence is between what price I can buy a pair for and what price I can sell apair for For the majors it is commonly three to five pips As brokerages getmore and more competitive, this spread is narrowing The spread is yourcost to enter You pay the spread when you enter and exit By the way, thespread is nothing new, nor is it solely a function of the forex market Thereare spreads you pay in the stock and futures market as well And just likethe forex market, more liquid symbols have tighter spreads while illiquidsymbols have wider spreads

vi-I often feel a little silly talking about illiquidity when it comes to forexpairs and cross rates I mean after all, in a nearly $3 trillion per day mar-ket (and still growing), it’s difficult to find a pair that doesn’t have decentvolume But I assure you, there are some that fall behind in the participa-tion department Look at the spread If, as I mentioned before, the majorshave a tight three to five pip spread, anything larger than that indicates one

of two things: First the pair is, by comparison to other pairs, less traded,

or second, there is an economic event or some such news event that isincreasing volatility

Cross rates should be traded when the home nations of the currencyare active To understand what moves a currency you must be in tune withevents, political and financial, so that you can be ready for explosions involatility and get an overall feel for what moves the pair and when it movesthe most That’s the edge It’s not fundamentals I am talking about; rather

I am referring to the psychological ebb and flow of that financial center Iknow I have this edge for the U.S session as I live in the United States andtrade the Dollar Index alongside my forex pairs I know when the president,treasury secretary, Fed chairman, or other relevant official is scheduled

to speak I won’t be blindsided by comments or events that I am neitherawake for nor know about—as I could and would likely be if I traded thecross rates Think about where you live and how you can attain this edgefor yourself Look at international calendars I know, for example, that re-gardless of the fact that I live in the United States I must know the sched-uled events for Europe and the United Kingdom, ECB (European CentralBank), Jean-Claude Trichet (ECB President), BOE (Bank of England), BOJ(Bank of Japan) these are all factors that will affect the way the pairs

trade If you want a great international calendar, you can check out one

of my favorites at www.forexfactory.com That calendar will give you thetime, country, name, and expected impact of the data Not to mention theall-important consensus number, which I will discuss later The currencymarkets are interrelated in a way that most traders are unaccustomed to.Even some stock traders don’t understand the degree to which their stocksare weighted in the large indices like the S&P, Dow, and NASDAQ Theyfail to understand that when a leader of a particular sector is weak, thattide lowers all boats Forex traders are in a similar situation but in a muchbroader, much more interwoven context

I’ve often said and do believe that forex traders have a unique vantagepoint on the market It’s not only an asset but a necessity to be able to un-derstand how the markets affect one another Trading currencies encom-passes all the other markets, equities and commodities included, because acurrency is the stock of a country Keeping this in mind, I don’t want othermarkets to become a distraction or take you from the primary focus of thepair you are setting-up to trade, but there are relationships we will discusslater on; these are the market pulse charts

It’s important to consider the other markets that affect the pairsbecause the primary reason the overlap between Europe, the UnitedKingdom, and the United States is so valuable is that it combines a number

of things that in combination make for the most active and volatile hours

of each trading day That’s exactly why I consider this prime time First

remember that each financial center opens like a freight train I purposelyuse 7A.M for each center because it’s early and I know that as people filterinto work there will be a gradual increase in market attention and there-fore participation Think of 7A.M to 8 A.M in each center as the premarketand then 8A.M to 9A.M as the open There is no bell, so it’s not a horserace As Frankfurt opens Europe, the opinions of the European financialcommunity are reflected along with the last two hours of the Asian ses-sion There is a two-hour overlap between Europe and Asia and a one-hour

overlap between the United Kingdom and Asia But again remember, it’snot as if Asia rings a bell and the currencies stop trading there It slowlygrinds to a halt as Europe slowly begins their open Think of a baton beingpassed from one relay runner to the next.

The London session is my favorite to trade if and only if I am going toplay a clearing session/opening range play This is a set-up that can also

be done specifically for the Tokyo open and the New York open as wellbut works best on London It’s fairly straightforward so I’ll explain it here,since it is mostly a time-based strategy

If you are coming from a stock daytrading background, this will soundawfully familiar; same goes if you have traded intraday futures For those

of you who haven’t and for the sake of making sure that we’re on the samepage, let’s explain the phenomenon of the opening range or “clearing pe-riod.” Since most markets, other than the forex, actually open and closewith a rather thin premarket and after-hours session, there are bulks of or-ders that are waiting to be executed before the real trading hours open.Let’s use the U.S stock market as an example At 9:30A.M EST the marketopens with the ringing of the bell on Wall Street The flood of orders allwaiting to be filled hits the order desks all at the same time This rush oforders being filled, along with market makers and specialists taking theirown position among the order flow creates a morning range that usuallyestablishes a high and low 20 to 30 minutes after the open That type of ac-tivity can and does translate to the forex market, but rather than the marketopen, we’re looking at the financial center open

These levels are known as the “clearing high” and the “clearing low”and reflect the upper and lower limits (think support and resistance) basedupon the early mass of orders being filled Again this all happens in about

20 to 30 minutes, so if you imagine London gearing up for the day, executingthe orders first thing about 3A.M EST, which translates to 8 A.M in London

to 3:30A.M EST or 8:30 A.M in London These 30 minutes will hold the key

to breakouts and breakdowns as the market action settles down and priceaction looks for the trend it will take for the day or at least for the morning

In order to recognize the clearing high and low, use a five-minute chart.This is the only time I personally trade off a time frame this short in dura-tion The five-minute chart makes identifying the clearing highs and lowsmuch easier It’s not that you are simply marking the high and low of thefirst 30 minutes of the day Rather you are looking for a first morning rever-sal where you can see the buying shift to selling (the high) and the sellingshift to buying (the low) Some days it’s clearer than others Some days itwill basically be in the 30 minute high and low I call these morning pivots,but let me be clear; these are not pivots points—just directional shifts that

I call pivots

Once you have the high and low drawn on your chart, sit back and wait.The play is to short breaks down through the clearing low support and

buy breaks up through the clearing high resistance I will often use filterslike the MACD Histogram that I use for momentum trading to confirm thebreakouts/breakdowns.

While I call this an “opening range play” or set-up, I acknowledge thatdiscussing an “open” is odd when it comes to a true 24-hour market but

there is an open and close as the major financial centers begin and endtheir trading day That’s what we’re playing off It’s a time-based strategythat reflects the psychology of the open and the support and resistance thatare created by the mass filling of “overnight” orders and fresh orders for themorning Consider the order flow reflective of banks and institutions andtrading desks all across the financial centers and the countries it reflects,and you get a better idea of the kind of size that is executed upon starting

a brand new work day

Don’t make this set-up more complicated—it’s the simplicity thatmakes it work and frankly the shortened time frame doesn’t entertain get-ting too analytical about the price action! The point here is to realize thatthis is (1) a short term time frame set-up—tried and true “daytrading” and(2) the breakout or breakdown is not meant to be taken as a new trend butrather a momentum play If you’re up early one morning, give this set-up atry At least draw the clearing levels and see how the price action plays out

a few times before trying it with your live account

Prime time is the four to six hours where the focus is primarily onLondon and New York Here’s the thing about prime time, though OnceLondon winds down its own trading day, it essentially ends the marketoverlap between two financial centers Realize that once London is closedthe only major financial center open is New York No overlap, no trading.The fact that the majors all have one thing in common (the U.S dollar)and the fact that the bulk of U.S data which would affect the greenback

is released typically between 8:30 and 10 A.M EST, accounts for theimportance of the hours between 7A.M and 1 P.M EST and also for why it

is the most volatile time for the EUR/USD, USD/JPY, GBP/USD, USD/CHF,and USD/CAD Next, we’ll take a look at the actual pip movement rangesover time While I am sure most of you will take my word for it when I sayfocus on the European, U.K., U.S overlap, a few statistics to back it upwon’t hurt

PIP MOVEMENT

The graphs that I am about to show you are courtesy of AutochartistPowerStats (www.autochartist.com/autochartist/PowerStatsBasic) Theyare pretty self-explanatory, but there are few ideas I want you to consider

as you look at each graph

First, take note of more than just the highs and lows of each tradinghour—which are all in EST—notice the average.

Second, don’t think that just because the pair has a higher high rangethat it is the pair you should be trading (Note to you GBP/JPY traders!Traders don’t call that pair the “twisted sister” for nothing!)

Third, notice how often the 8A.M to 10 A.M period is the most activeand most volatile That’s a double-edged sword, my friends!

Fourth, notice how inactive the Asian session is for most of the majorpairs but not all the pairs!

Fifth, well, there’s really no fifth; however, what I want you to comeaway with from these graphs is to hammer in the prime time of each pairinto your habitual trading and notice when the activity drops off and picks

up again in line with regular economic data releases

The graphs are set to a six-month sample, which means that whilethis is typically representative of the average pip movement, unusualoccurrences can and will affect the overall range and thus the average.These do not usually skew the data to the point of taking you away fromthe main active hours, but can make certain hours look more active thanthey would historically be In the following graphs, the 23:00 time wasaffected by such a one-time volatile occurrence in the last one month I willkeep updated graphs posted at my personal blog ragheehorner.com everyfew months so you can certainly check on any changes or observations I

am making note of

A DAY WITH THE EUR/USD

The graph of the “price movement range by hour of day” of the fiber (youknow that’s the EUR/USD now, right?) is laid out in a 24-hour breakdown,and it is in Eastern Standard Time Now recall when each financial center

is coming in and out of the market as you look at each hour on the graph.Remember that the fiber is representative of Europe and the United States.(See Figure 7.1)

The specific hours to focus in on are the 17:00, which would beSydney’s first look at the day; then 18:00, when Tokyo is gearing up fortheir trading day, and then jump ahead to 2:00, when Frankfurt enters thepicture and creates the European/Asian market overlap Notice the bars,the high, the low, and the average Again, keep in mind that the 23:00 is ananomaly representative of a move that is not a historical norm What can

we get from this chart—the most traded forex pair—as we look at the ture of its hour by hour trading? When is this pair the least active? You canclearly see that the hours between 16:00 and 22:00 are the least volatile Ifyou were to ignore the 23:00 anomaly you would see that activity does notpick up again until 2A.M EST which is 8 A.M in Frankfurt So how active is

na-100 90 80 70 60 50 40 30 20 10 0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 –10

Average Area of high probability

EUR/USD Price movement range by hour of day

Hour of Day

this pair in the Asian session? Not very How about looking at the 8:00, 9:00,and 10:00 hours? These are prime time hours when New York is overlappedwith Frankfurt and London They are also the hours that most often includethe key economic releases in the United States and thereby affect the U.S.dollar That’s the importance and the reason why the hours between 7A.M.EST and 1P.M EST are so important You could really narrow it down tobetween 8A.M and noon EST, but there are set-ups and price action thatmerit being at your desk a little earlier and staying a little later

Now if you weren’t sure if Europe and the United Kingdom require orwait on the opinion of the United States to move the EUR/USD, take a look

at the lull at 5:00, 6:00, and 7:00 After the Asian/European overlap ends at

4 A.M EST and the last push of order comes out of Sydney, Tokyo, HongKong, and Singapore, you’ll see that while Frankfurt and London make upthe largest percentage of activity for the forex market each day, somewheretypically in the vicinity of 40 percent, they seem to be waiting for New York

to join the party So what does that tell you? Unless you are willing to sitthrough what can be described as a slight trough in activity between Asiawinding down and the United States gearing up, you are likely just as well

to wait to trade until 7A.M EST And that’s why I don’t get up at 2 A.M EST!Now let me add this: There are days when set-ups will trigger dur-ing these hours between 2:00 and 4:00 Certainly I am not saying that the