Distribution of GBP/USD daily high and low during a day

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Written by Forex Automaton   
Wednesday, 31 March 2010 16:01

I continue documenting the distributions of the moments of time daily high and low for the popular forex pairs are achieved. Some of the motivations for such type of analysis have been outlined in the first post on the topic. Availability of temporal distributions of volatility during a day (see the one for GBP/USD here) puts this type of study in a new context: significant deviation of shapes between the two distributions can be used to challenge a random walk model to reproduce the distribution of high and low on the basis of the volatility distribution.


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

Fig.1. Distribution of time moments when GBP/USD 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.

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.

Central European 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. 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.

There are three major activity peaks corresponding to Japan, Europe and the Americas. Active trading likely begins around 8am in the morning in each of these zones. 8am-9am Tokyo is, even if by a tiny (and not statistically significant) margin, the most likely time for the day's top in GBP/USD to be achieved, despite the fact that both currencies belong to the Western hemisphere. The most likely time for the daily low is between 16:00 and 17:00 CET.

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.

The subtle difference in shapes of the distributions for high and low in Fig.1.1 is intriguing. It indicates that the daily low tends to occur later in the day during the Asian and European session, while during the late afternoon in America, the likelihood of a high is somewhat larger.

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 ( Friday, 14 January 2011 13:24 )