EUR/AUD 2002-2008: specific patterns of trading sessions
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Written by Mikhail Kopytine   
Thursday, 22 May 2008 15:26

This article develops one of the themes in the EUR/AUD predictability overview, namely that of the daily cyclic pattern of market action. We analyze the patterns time zone by time zone -- with curious insights into market dynamics.

For the purpose of analysis we define three time windows (or zones). Expressed in New York time, they are

  • Australasia (Asia-Pacific): 7pm-6am
  • Eurasia (from Near East to London; for simplicity we may also call these Old World traders Europeans, which is what they likely mostly are): 1am-12pm
  • America (South and North Americas, including West Coast): 8am-8pm
The labeled time intervals are inclusive, that is, e.g., 1am-12pm refers to a series of 12 time intervals, each 1 hour long, ending respectively at 1am, 2am, and so on through 12pm New York time. As the time series consists of logarithmic returns, the first item is always a return with respect to an hour which precedes the beginning of the series.

EUR/AUD bulls correlation short range

Fig.1: Autocorrelation of hourly logarithmic returns in EUR/AUD for the time zones labeled using New York time and explained in text. The time lag is in "business time" (periods without update ticks are excluded).

In the figures below we show sub-sampled "bullish" and "bearish" autocorrelations, with further restriction of the time zone on the data. It is impossible to interpret the "bullish" and "bearish" autocorrelations without either the counterpart trend reversal autocorrelations or the total autocorrelation. Therefore we start with the total autocorrelation (Fig.1) where all the nontrivial structures are at least order of magnitude lower than the amplitudes of the oscillations in the bullish and bearish components (Fig.2). This means that to the first order, the oscillations in Fig.2 and 3 are caused by the daily oscillations of market activity. The features in Fig.1 should be compared to the Fig.2 of the EUR/AUD predictability review -- it turns out that the individual sessions are much more correlation-rich than the overall picture.

EUR/AUD bulls correlation short range

Fig.2: Autocorrelation of positive hourly logarithmic returns in EUR/AUD for the time zones labeled using New York time and explained in text. The time lag is in "business time" (periods without update ticks are excluded). "America: random" shows a martingale simulation time series subjected to the same time zone selection as "America", but devoid of correlations (and time zone variation) by construction.

Fig.1 and 2 focus on the autocorrelations with time lags of 120 hours and less which would correspond to the time scale of interest to a day trader or a swing trader. Both "bullish" and "bearish" autocorrelations show spikes for Eurasian and Australasian trading sessions -- with a remarkable difference of a roughly opposite phase! In other words, the minima of the Australasia correlation roughly correspond to the maxima of the Eurasian one, and vice versa. A simple explanation of this would be the time difference between the peaks of the trading activity in the Atlantic and Pacific regions, with most activity coinciding with the European afternoon. The time difference is 9 hours between London and Sidney and 8 hours between London and Tokyo. It is interesting that the histogram for the American session is fairly flat on the short time scale (time lags < 100 hours).

EUR/AUD bulls correlation extended time lag axis

Fig.3: Autocorrelation of positive hourly logarithmic returns in EUR/AUD for the time zones labeled using New York time and explained in text. The time lag is in "business time" (periods without update ticks are excluded).

In Fig.3 we extend the time lag axis -- and see quite an interesting and unexpected change of picture. American traders do follow the developments which took place more than 100 hours ago, as seen from their histogram becoming spiky for the time lags over 100 hours. Moreover, their histogram becomes spiky in phase with that of the Australian and Pacific Asian traders, while spikes in the Eurasian histogram undergo a half a day change in phase and the pattern adjusts itself to the other two. (Peaks at -420 (17.5x24), -396 (16.5x24), -372 (15.5x24) and so on common to all three time windows are clearly seen.) Even if the oscillation itself and the phase difference between different trading sessions can be explained by the fact that the maximum of action occurs during a particular (Atlantic) trading session, the change of phase can not be explained so easily.

Perhaps the right interpretation is the following: short range trends are determined during the Atlantic session but on a longer range the markets shift the attention to look at the Pacific session for the guidance.

In this analysis, we used data from from 00:00 2002-08-20 to 00:00 2008-02-01 (New York time).

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