Forex Automaton

CHF/JPY resembles AUD/JPY in that its temporal distributions for high and low are heavily dominated by the early hours of the day (Central European time), reflecting morning activity in Japan.

Fig.1 histograms the moments of time daily extreme price levels (either low and high) are achieved. The horizontal axis is split into 24 bins, for 24 hours of the day. Bin boundaries are at 00:00, 01:00, and so on -- in Central European time. As with other forex rates, the distribution for CHF/JPY demonstrates a high degree of predictability in the times of occurrence of daily extremes.

Central Europen time is chosen for the following reason. Forex week begins, roughly speaking (since the volume increase is gradual) on Sunday 5pm and ends Friday 6pm Eastern time. It is convenient to define this week to consist of 5 full days, from 6pm Sunday to 6pm Friday New York time. When it's 6pm in New York, it's midnight in Berlin, Paris, Madrid, Rome, Geneva and Frankfurt. These cities use Central European Time or CET. Therefore, the convenience of using CET is that one gets 5 non-interrupted, full 24-hour long trading days per week. Table 1 compares four time zones including major trading centers of the world.

The vertical axis of the histogram is simply the number of times, during the period of 2003-2009, when the daily high or low occured within the speficied time bin.

Typically with forex pairs, there are three major activity peaks corresponding to Asia Pacific, Europe and the US. With CHF/JPY for some reason the picture of three peaks is somewhat smeared as there seems to be less of a break between Europe and the US in this pair. As usual, there is a spike in daily high and low probability within a single burst just at the beginning of the trading day there (8am-9am Tokyo time). CHF/JPY shows more difference in high and low patterns during the day than most other pairs; in particular, the currency likes to make daily lows during the peak hours of European and American trading while the daily highs happen often immediately before or after those periods.

The double peak structure of the American trading session, with the local minimum around 15:00 (9am Eastern time) curiously, begins to look statistically more and more significant with every new currency pair analyzed.

The two bottom panels of Fig.1 prove that the activity pattern reproduces itself with a fair degree of stability year after year.

For the hour-scale trading system currently under development, information such as this may help improve the system performance by eliminating time intervals with little profit potential from consideration. A discretionary trader can use this information to help identify large moves happening at unusual times. Such an event may indicate a signficant shift in the balance of market forces. It may serve as an advance warning, alerting the trader to a possibility of an even larger move in the same direction during the regular hours of the pair's activity.

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