Temporal distribution of GBP/JPY low and high during a day

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Written by Forex Automaton   
Wednesday, 04 August 2010 13:27

GBP/JPY, CHF/JPY and AUD/JPY seem to fall in the same group as far as the temporal distributions for high and low are concerned. The most likely time for the day's high and low to be made in these currency pairs is the early hours of the day (Central European time), reflecting morning activity in Japan.

Timing of daily high and low, GBP/JPY, 2003-2009, CET 1.1 Timing of daily high, GBP/JPY, 2003-2009 year by year, CET 1.2 Timing of daily low, GBP/JPY, 2003-2009 year by year, CET 1.3

Fig.1. Distribution of time moments when GBP/JPY daily high and low are achieved, 2003-2009. 1.1: high and low, all years added; 1.2: high only, all years separately; 1.3: low only, all years separately. The hatched bands indicate Poissonian statistical error estimates for the bin contents.

Tokyo 9 1011 1213 14 15 16 17 18 19 20 21 2223 0 1 2 3 4 5 6 7 8
Central Europe 123456789101112 13141516171819202122230
Greenwich 01234567891011 121314151617181920212223
Eastern US 19202122230123456 789101112131415161718

Table 1. Time zone conversion table. Seasonal time shifts, such as daylight saving time, may complicate the picture if the nations choose to enact them on different days, and are ignored.

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 GBP/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 occurred within the specified time bin.

Typically with forex pairs, there are three major activity peaks corresponding to Asia Pacific, Europe and the US. For GBP/JPY, like for other two pairs involving JPY, namely CHF/JPY and AUD/JPY, but not USD/JPY where a strong activity peak is seen during the US trading hours. 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 and Japanese trading dominates the picture.

A note added on January 14, 2011: one should be careful not to over-interpret the fact that the extremes of the daily range seem relatively more likely to be achieved in the first and last hours of trading. The same effect has been seen in random walk data.

GBP/JPY shows some difference in high and low patterns during the day; 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. Same was said about CHF/JPY.

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 significant 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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Last Updated ( Thursday, 17 March 2011 16:58 )