Optimize trading performance by time of day selection

Yesterday I shared a link via Facebook and Twitter to an article on the DailyFX site which talks about the best times of day to trade. The article makes a case for trading during the lower volume periods of time. This is based on the view that most retail traders tend to be counter-trend or range-trade oriented and as such the lower volatility of the off-peak hours tend to suit their style better.

I have long held the view that volatility is a major factor in trader performance and one day I hope to do some real research to see if that’s really the case. Certainly systems and methods that are based on trading narrow ranges will suffer when that isn’t the case and range trading systems will fall victim to trending markets.

There’s a problem with the data presented in the DailyFX article, though. It only shows the win % of trades done during those periods (though we don’t know if they are opened and closed, just opened, or just closed in the hours presented). As I’ve harped on here and in other places, win % alone doesn’t tell you anything. You need to know the average gains and losses as well.

To back this up, I once saw data on the performance of a large collection of forex traders. Over a given time frame (don’t remember how long that was) they traders were profitable on something like 60% of their trades. Even though that was the case, the group as a whole still lost money.

Now, the DailyFX article does show performance figures for a trading system when times of day are factored in which suggests better profitability. That would tend to support the overall hypothesis, though obviously it’s just one example. I’m not arguing the general point. It definitely does make sense to look at how the markets trade during certain times of day and not just go along with the matra of the London/NY overlap presenting the best trading opportunities. I want to make sure we’re looking at the data properly and applying it effectively to our own situations in a useful fashion.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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