Day Trading the Currency Market : Technical and Fundamental Strategies To Profit from Market Swings?

As a following article to the previous one "Currency Volatility and the Disparity of Currency Outlook", I dig out the following book from Google, written by Kathy Lien, a seasoned FX analyst and trader, which could be useful for designing specific FX trading strategies that try to capitalize the heighted volatility in the market place.

Here are some interesting contents taken from her book:

Asian Session (Tokyo): 7 P.m.–4 A.m. EST

FX trading in Asia is conducted in major regional financial hubs; during the Asian trading session, Tokyo takes the largest market share, followed by Hong Kong and Singapore.

For the more risk-tolerant traders, USD/JPY, GBP/CHF, and GBP/JPY are good picks because their broad ranges provide short-term traders with lucrative profit potentials, averaging 90 pips. Foreign investment banks and institutional investors, which hold mostly dollar-dominated assets, generate a significant amount of USD/JPY transactions when they enter the Japanese equity and bond markets. Japan’s central bank, with more than $800 billion of U.S. Treasury securities, also plays an influential role in affecting the supply and demand of USD/JPY through its open market operations. Last but not least, large Japanese exporters are known to use the Tokyo trading hours to repatriate their foreign earnings, heightening the fluctuation of the currency pair. GBP/CHF and GBP/JPY remain highly volatile as central bankers and large players start to scale themselves into positions in anticipation of the opening of the European session.

For the more risk-averse traders, AUD/JPY, GBP/USD, and USD/CHF are good choices because they allow medium-term to long-term traders to take fundamental factors into account when making a decision. The moderate volatility of the currency pairs will help to shield traders and their investment strategies from being prone to irregular market movements due to intraday speculative trades.

U.S. Session (New York): 8 A.m.–5 P.m. EST

New York is the second largest FX marketplace, encompassing 19 percent of total FX market volume turnover according to the 2004 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2004, published by the Bank for International Settlements (BIS). It is also the financial center that guards the back door of the world’s FX market as trading activity usually winds down to a minimum from its afternoon session until the opening of the Tokyo market the next day. The majority of the transactions during the U.S. Session are executed between 8 a.m. And noon, a period with high liquidity because European traders are still in the market.

For the more risk-tolerant traders, GBP/USD, USD/CHF, GBP/JPY, and GBP/CHF are good choices for day traders since the daily ranges average about 120 pips. Trading activities in these currency pairs are particularly active because these transactions directly involve the U.S. Dollar. When the U.S. Equity and bond markets are open during the U.S. Session, foreign investors have to convert their domestic currency, such as the Japanese yen, the euro, and the Swiss franc, into dollardominated assets in order to carry out their transactions. With the market overlap, GBP/JPY and GBP/CHF have the widest daily ranges.

For the more risk-averse traders, USD/JPY, EUR/USD, and USD/CAD appear to be good choices since these pairs offer traders a decent amount of trading range to garner handsome profits with a smaller amount of risk. Their highly liquid nature allows an investor to secure profits or cut losses promptly and efficiently. The modest volatility of these pairs also provides a favorable environment for traders who want to pursue long-term strategies.


European Session (London): 2 A.m.–12 P.m. EST

London is the largest and most important dealing center in the world, with a market share at more than 30 percent according to the BIS survey.

Most of the dealing desks of large banks are located in London; the majority of major FX transactions are completed during London hours due to the market’s high liquidity and efficiency. The vast number of market participants and their high transaction value make London the most volatile FX market of all. Half of the 12 major pairs surpass the 80 pips line, the benchmark that we used to identify volatile pairs with GBP/JPY and GBP/CHF reaching as high as 140 and 146 pips respectively.

GBP/JPY and GBP/CHF are apt for the risk lovers. These two pairs have an average daily range of more than 140 pips and can be used to generate a huge amount of profits in a short period of time. Such high volatility for the two pairs reflects the peak of daily trade activity as large participants are about to complete their cycle of currency conversion around the world. London hours are directly connected to both the U.S.

And the Asian sessions; as soon as large banks and institutional investors are finished repositioning their portfolios, they will need to start converting the European assets into dollar-denominated ones again in anticipation of the opening of the U.S. Market. The combination of the two reconversions by the big players is the major reason for the extremely high volatility in the pairs.

For the more risk-tolerant traders, there are plenty of pairs to choose from. EUR/USD, USD/CAD, GBP/USD, and USD/CHF, with an average range of 100 pips, are ideal picks as their high volatilities offer an abundance of opportunity to enter the market. As mentioned earlier, trade between the European currencies and the dollars picks up again because the large participants have to reshuffle their portfolios for the opening of the U.S. Session.

For the more risk-averse participants, the NZD/USD, AUD/USD, EUR/CHF, and AUD/JPY, with an average of about 50 pips, are good choices as these pairs provide traders with high interest incomes in additional to potential trade profits. These pairs allow investors to determine their direction of movements based on fundamental economic factors and be less prone to losses due to intraday speculative trades.

U.S.–European Overlap: 8 A.m.–12 P.m. EST

The FX markets tend to be most active when the hours of the world’s two largest trading centers overlap. The range of trading between 8 a.m. And noon EST constitutes on average 70 percent of the total average range of trading for all of the currency pairs during the European trading hours and 80 percent of the total average range of trading for all of the currency pairs during U.S. Trading hours. Just these percentages alone tell day traders that if they are really looking for volatile price action and wide ranges and cannot sit at the screen all day, the time to trade is the U.S. And European overlap.

European–Asian Overlap: 2 A.m.–4 A.m. EST

The trade intensity in the European–Asian overlap is far lower than in any other session because of the slow trading during the Asian morning. Of course, the time period surveyed is relatively smaller as well. With trading extremely thin during these hours, risk-tolerant and risk-loving traders can take a two-hour nap or spend the time positioning themselves for a breakout move at the European or U.S. Open.