For F. Scott Fitzgerald, "in a real dark night of the soul, it is always three o'clock in the morning, day after day."

For forex traders, however, three in the morning may be a long way from being the worst time of day.

In fact, according to a research paper from Deutsche Bank, this could be the best time to trade forex pairs.

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3am, or 8am?

 

Actually what Daniel Brehon and Nicholas Weng are suggesting is not getting up spectacularly early every day – at least if you live in the UK or Europe. The 3am premise is for New Yorkers – Eastern Time.

Why? According to the authors of the report, it’s because there is a very strong pattern of strength in USD against European pairs from that time. Once the New York session gets underway there is a documented pattern of reversal worth 2-3 basis points each time.

Volatility spikes on the open – it’s highest for EURUSD on the London open and then at the US open. AUDJPY volatility hits intra-day peaks at the start of trading in New York and then in Tokyo.

"Correct versus incorrect intraday timing may make the difference between paying twice the effective spread (if your expected intraday return is negative) versus paying zero or even receiving effective spread (if your expected intraday return is positive),” the Deutsche Bank pair are quoted as saying in Bloomberg.

Front-running

 

Can you base a trading strategy around such recurring patterns in forex? It is, after all, what the algos do and it might just be they are behind the trend as they represent more and more of the market.

Anyone trading USDJPY is no doubt familiar with the daily ramp when the markets open in Japan.

And the report highlights the yen as arguably one of the most interesting trades.

It shows, for example, that EURJPY spikes higher in the US session (11-5 EST) and then swings back down between 5 pm-11am in a move worth 3 basis points.

The Aussie and Kiwi show even more pronounced movement intra-day, with AUDJPY and NZDJPY swings worth 4-5 basis points.

Against Asian currencies generally, USD ramps in the Tokyo session after its usual weakness in the US session.

Bonds

 

It’s not just forex markets where timing is essential. Bond traders are also increasingly operating 24 hours a day because of the lack of liquidity in the market.

For example, rather than trading the underlying instruments, traders are opting for synthetic products to trade on cash bonds. It means more liquidity in the futures markets.

Research from JPMorgan, Goldman Sachs and Citigroup, reported by Bloomberg, indicates that more and more bond market trading by US players is happening before US markets open. 

Trading is all about timing, but there are clearly more layers to this adage than merely knowing when to enter or exit based on the price or technical. For intra-day trading, the clock also matters.