INTRADAY TRADERS, particularly those that trade the 5M and 15M charts, often miss one simple fact – many days, price will complete its average true range (ATR). The range can be gotten off a simple indicator on the daily charts. It is true that it is an average number, so some days will have less pips, and others will have more. However, by and large, most days in my experience come pretty close to the ATR.
HOW CAN YOU PROFIT FROM THIS FACT?
First, we have to study the “sessions”. The foreign exchange market trades 24 hours a day during the week, but it is divided into 3 “sessions” – London, New York and Asia. I do not want to delve into those in detail here, but suffice it to say that the London morning session is (for me) 8-11am in London and the New York morning session is 8-11am in New York, whatever the local time is. Daylight savings time can mess things up so it is best to just check the actual time rather than quoting it based on GMT. I personally like the Forex Timezone Converter.
The Asian session occurs well, in the morning of Asia. Most base it off Tokyo, although some consider Australian time. Essentially, a good chunk of the time, the Asian session is quiet for trading. This does not mean that it cannot be traded, incidentally. If you choose to trade this session, use a reversion to the mean system – trades tend not to trend, so betting on a return to the range is usually a good idea.
The London morning is far and away the best session to trade – it moves well, especially Tuesdays to Fridays. Mondays can be choppy or tepid in all sessions. This is a trending session, usually. It may fake you out occasionally, but generally it will behave itself, giving the possibility of many pips.
The New York session is the London afternoon. This is also known as the NY-LON session – it has been traditionally touted by forex “gurus” as the prime session to trade. I disagree. I rank it second best. I have found this session to be generally more choppy than the London session over the years. I believe this is partly due to London traders winding down their positions in the New York morning as the London day draws to a close.
HOW TO COMBINE ATR AND FOREX TRADING SESSIONS
Here are some tips related to the trading sessions:
Asian session: The ATR of the day is usually only used up by 1/3 or so in the Asian session. Occasionally, the Asian session range can even go up to 50 pips. However, this range is tricky for trading, as it only truly defines itself towards the end of the session. If you can get a clear range trade, one method to trade is to use false breakouts. Wait for price to break out of a defined range during this period, and then go counter to the breakout direction when it immediately goes back to the range. Many times, this will head to the other side of the range, so you can adjust your risk-to-reward ratio accordingly. Note that there is usually a month or two in the year when the Asian session trends, but I have not noticed any seasonal pattern to this. The methods of detecting those are beyond the scope of this discussion.
London session: The London session is the turnkey session. We can have a few types of days, but the most common is the fake and turn pattern. On the daily chart, notice that most candles on any currency pair has wicks. This means that sometime during the day, price pushed up/down, made the high/low for the day, and then roared in the opposite direction for the rest of the day, and then made the low/high in that direction before pulling back a bit. This gives a daily candle wicks on both sides.
Well, London is often when the first wick of the day is formed. This can happen with price doing a false breakout (as described with the Asian session) and then turning back into the range to punch through the other side. This can also happen with a fake breakout move in Asia continuing into a proper breakout trade. Essentially, during London, we know that the high or low which we can hook the ATR on will likely be formed, but we need more price information to tell where that is. Thus, the bias is based on the usual factors – trend, momentum, cycle, time and trigger.
The key to trading ATR in London is this – if you are trading in the direction of the London trend, make sure that less than 2/3 of the daily ATR has been completed. If more has been completed, you could be hopping on the bandwagon too late. Of course, if you think the move is fake, then your advantage increases as the ATR completes.
New York session: The New York session is when the ATR comes into its own. The market has very often tipped its hand by the time New York opens. London has trended in one way or another. If it has gone in the direction of the major trend, then New York will continue this move before eventually stopping to pull back, usually at the end of the New York morning session. This type of countertrend pullback is not really worth trading, as it can be very shallow. HOWEVER, IT IS A COMPLETELY DIFFERENT STORY IF THE DAY WENT COUNTERTREND. What this means is that the day was a “rewind” day. If the trend was up, a day that has been moving down is likely to meet support. Thus, once the ATR for the day is fulfilled, it is a logical place to look for a buy. This simple fact alone can be extremely useful.
In short, for the NY session, use the ATR as a guide to help you pick when the top or bottom for the day has been put in, and trade in the direction if your trading plan allows you to do so. This is especially true if the move has been counter the major trend and allows you to enter at a “sweet spot”.
This information will probably seem a bit convoluted, but if you take the time to work it through and combine it with your intraday trading strategy, you may find that there are many benefits to being aware of the session times and the amount of the ATR that has been “used up” already for the day.
With best wishes for your trading,
Private Fund Trader/Head Trader Consultant
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