There is no mystery that the world is full of patterns and we're governed by them and the financial market are not exception of this rule. The time element such as the time of the day could also play a big role in how certain FX pairs may behave. There is anempirical research conducted by major institutions which suggest that there are strong evidence of a predictable time-of-day pattern in FX. This research was conducted by Angelo Ranaldo from SNB.

The main idea behind this article will be to turn a simple trading pattern backed up by an extensive empirical research into an automated trading system using the Visual JForex platform.

  • Time-of-Day Effect

The major currency pairs have a strong tendencies to depreciate during local trading hours and tend to appreciate during foreign trading hours. (eg. EUR/USD tends to depreciate in the European session and then appreciate in US session). These time-of-day patterns are statistically and economically highly significant as they show the tendency of market participants to be net purchasers of foreign exchange in their own trading hours. The research concluded that there are two main factors that can explain this pattern:

  1. Liquidity - determined by the imbalances between supply-demand equation at specific intraday times.
  2. Asymmetric information effects - local traders tend to have superior information because of their networking, trading location and the time zone in which they operate.
They come and suggest that liquidity is the detrimental factor for the time-of-day effect which is caused by portfolio balance effects. Going further there are two main factors that contribute to the portfolio balance effects:

  1. Domestic-currency bias - means that traders located in one specific country tend to hold assets denominated in the reference currency of that country. Their portfolios typically include domestic assets and, therefore, the domestic currency prevails over foreign currencies.
  2. Domestic-time bias - refers to the actual time when trading is done. For instance, US investors, brokers and dealers will tend to exchange US dollars against euros during the main US hours of work.
This are the basic premises behind the time-of-day pattern that suggest the home currency depreciates during domestic trading hours and appreciates during foreign trading hours. In aggregate, the geographic segmentation, coupled with the domestic-currency bias, creates sell-price (buy-price) pressure during domestic (counterpart) working hours.

If you wish to read more, please follow the link: Segmentation and Time-of-day Pattern in Fx

Best Regards,
Daytrader21
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