My Latest Currency Trader Magazine Article Exploiting an Asian Session Based Inefficiency

Certainly some of you will remember my June Currency Trader Magazine article in which I did a study of the Asian session showing that this trading time frame has very predictable characteristics which become evident when normalized through the eyes of a volatility criteria such as the ATR. Near the end of that article I said that I was working on the development of a trading system to exploit this predictable behavior, something which is precisely the subject of my latest Currency Trader magazine article (which was released the day before yesterday). During this blog post I will talk a little bit about this article and why it is an important achievement for me in the area of automated trading system development.

For those of you who are not familiar with the magazine, Currency Trader is one of the most world-renowned online publications dealing with forex and futures trading. The magazine features publications from very knowledgeable people around the field of trading, showing you things from concrete system development (like my articles do) to a fundamental analysis of the market or certain currency pairs (like Barbara Rockefeller shows). As a plus this publication is also available online for free here.

My August article on this magazine deals precisely with the exploitation of the predictability of the Asian session on the EUR/USD. Certainly if the Asian session was able to exhibit almost constant trading behavior (when normalized by an ATR) through an extensive period of time (you can read my June article to learn more) it was obvious to me that some type of inefficiency would have to come out from this phenomena.

My first approach was to look for the obvious, which was the exploitation of an inefficiency based on the ranges or total price changes within my June article but after doing research on this for a few days it became obvious that such a system could never be developed and simulated in an accurate way, especially using a program with the limitations in backtesting that Metatrader 4 so clearly has. In the beginning of the article I clearly highlight the reasons why I chose definitely NOT to trade within the Asian session to get a profitable system.
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Then I realized that the only way to build a system that gave accurate simulations which I could use to exploit the Asian session was to use the Asian session but trade after it was finished. This allowed me to build a system with wide profit and loss targets that could be simulated accurately which I could use for the Currency Trader Magazine article. Of course, the specific nature of the inefficiency I found and its nature can be seen on my article which can be downloaded free of charge for two months (if you are reading this after September/2010) you might need to purchase it).

The system was clearly an important achievement with very good profit and draw down targets that have additional merit in the fact that they were obtained without any optimization whatsoever. The simple nature of this inefficiency (which is almost entirely price action based) and the obvious predictable character of the Asian session made the system achieve good results during a 10 year testing period, although the June article only analyzes the Asian session from 2006-2010 showing that the predictability of this session probably goes all the way back to at least the beginning of this decade. Of course, if you want to see the exact results of this trading system feel free to download and read the article (again, available for free).

I liked this system very much because it shows you that the market works in a very interconnected manner. The fact that a trading period has predictable characteristics may allow you to exploit a completely different market period which appears to be extremely efficient on its own. It definitely seems that the obvious ways of developing market predictability are already efficient since the information is known to all market participants but this predictability in itself seems to sprout inefficiencies on other times of the day which are not obvious to all traders within the market, giving us the clear opportunity to exploit a tradable inefficiency.

Again, I invite you to go to the Currency Trader Magazine website to download and read my August article (you might also want to read the article after mine, a very interesting system developed on tick volume analysis). It would be great if you could leave a comment with your opinion about this CT article :o)

If you would like to learn more about my work in automated trading and how you too can start to gain a true education to build and trade likely long term profitable systems please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)

The Asian Session and Market Efficiency

It is quiet curious how most people believe that taking profits from the forex market is so easy. In fact, most people think that it is easy to make profits of even 20 or 50% each month in the forex market. This makes people go in the search for holy grail automated trading system that can achieve them these targets for several years. Unluckily, formal economic theory tells us that not only is it extremely hard to make ANY profit, it is even in dispute if ANY profit can be made consistently at ALL. Why is this ? The problem is related to what we call, market efficiency.

In an efficient market, price reflects all the information available to traders so there is no possible decision a person can make that can consistently give profits because of the adaptability of the market against any possible strategy. This theory assumes that there is no possible strategy a trader can make to take money out of the market consistently. In the end, the trader will lose money because of the commissions (spread in the case of forex) that has to be paid to enter and exit the market since his strategy does not give any overall profits.

Economists have battled for the last 30 years to show both sides of the story. Is the market efficient or is it not ? Right now, after much research, it has been shown that the market is not totally efficient in the sense that some trading strategies have shown to give consistent profits in studies and the fact that successful commodity and stock traders exist also show this fact to be true.

However this does not mean that the market is totally inefficient. The market will react to massive exploitation of inefficient behavior something which will change market behavior. This leads me to my example, the Asian trading session.

Throughout the last year or two, people realized that the Asian trading session was very flat in pairs that were not being traded. For example, the EUR/GBP, EUR/CHF, etc, behave in a flat manner during the Asian trading session. This lead some people to build scalping and other alike trading strategies to try to get profits out of the random movements during the flat periods in the Asian session. What happens when a lot of people start to exploit a behavior of the market that seemed predictable ?

What happens is pretty straightforward. People start entering trades in a session in which the market is flat in some pairs due to the closed status of some markets. However, by entering trades at this time, people introduce liquidity to the market, which in turn causes prices to change, which in turn causes short term movements to develop and volatility to increase. If you check out the Asian trading session on the EUR/GBP during the past few months, you will notice this phenomena happening. As more people try to exploit the before predictable "flat" behavior of the pair during the Asian session, the pair has changed its trading behavior. The market has become efficient and the exploitation of the former flat range for profit is now extremely difficult because of the higher volatility that is now experienced more and more frequently during this session.

In fact, you will notice with time that the strategies that do achieve consistent profits are extremely hard to trade psychologicaly for the trader, so they are in this sense "protected" from massive exploitation. This is why the turtle system continues to work after 30 years, it is a very good, but extremely hard to trade system, as well as the gods gift ATR and other long term profitable systems. If you would like to learn more about these systems, why they are so hard to trade, why they are long term profitable and how you too can start trading and designing and programing your own long term profitable strategies please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !