The Best Time to Trade
Chart 7: Trader Profitability by Hour of Day in Major Currency Pairs
Data source: Exas Capital accounts excluding Eligible Contract Participants, Clearing Accounts, Money Managers, and Hong Kong and Japan subsidiaries from 3/1/2014 to 3/31/2015.
Chart 8: Trader Profitability by Hour of Day in GBP/USD
Data source: Exas Capital accounts excluding Eligible Contract Participants, Clearing Accounts, Money Managers, and Hong Kong and Japan subsidiaries from 3/1/2014 to 3/31/2015.
To understand this increase in likelihood, look how the British pound behaves in terms of pip movement:
Chart 9: Average Hourly Absolute Change in GBP/USD from 2005-2015
Data source: GBP/USD price data derived from Exas Capital's price servers from 2005-2015.
Very quickly, you can see GBP/USD pip value varies significantly by time of day. On average, the pound was five times as volatile between 4:00 and 5:00 am as it was between 11:00 pm to 12:00 am.
Traders are generally more profitable when markets are less active.
How can you try to take advantage of these patterns? One way may be to mirror the simulated time-sensitive performance of the GBP/USD and trade like the straightforward range trader.
Let's backtest it. Using an RSI strategy, we buy and sell when GBP/USD crosses RSI lines. The 'Raw Equity' is not filtered for the time of day. The 'Filtered Equity' is filtered to off hours, between 2:00 pm and 6:00 am New York time.
Chart 10: Hypothetical Performance of RSI Trading Strategy in GBP/USD
Data source: Trading Station Strategy Backtester. GBP/USD 15-minute data from 4/1/2014-3/30/2015.
Past performance is no indication of future results, but by sticking to range trading only during off hours, the average trader would have been far more successful over the sampled period.