By Sam Evans, Online Trading Academy UK Forex, E-mini, and Power Trading Workshop Instructor
Indicators have both their advantages and their disadvantages. When most new traders are introduced to them, they get pretty excited as they believe that they have found the magic tools to solve all of their trading needs. They think that all that is needed to be consistently profitable in the Forex markets is to follow the signals of when to buy and sell when the indicator gives them, and then the rest will just work itself out. Ask any veteran trader if they do things like this, however, and I am sure the answer will likely come back as a resounding no! This is because professional, consistent traders understand that all technical indicators are lagging behind price, as the indictor itself requires price to form its calculations to give those buy and sell signals. You see, it actually takes price to start moving to send the data to the indicator to give the signal, which in turn results in the signal often being too late to make a correct entry. The consistent trader understands that an indicator has far better use as simply a confirmation or analysis tool, and knows that the fundamental skills that work all the time are those of risk management, discipline and strict rules, something which I constantly drill into my students on a daily basis during our ongoing XLT sessions.
However, this is not to say that I personally do not see the use in Technical Indicators; in fact far from it. If used the right way in the correct circumstances, these can be extremely powerful tools in the objective analysis process. Many indicators have almost forgotten uses as the majority of traders out there focus on their application as buy and sell tools. If we look beyond these parameters though, a whole new dynamic is presented to us. In this lesson, I will talk about the Average True Range Indicator or ATR and how it can be used to gauge the best times to trade various currency pairs in the Forex market.
First of all, ATR as an indicator is a measure of volatility which was created and introduced by Welles Wilder in his book: New Concepts in Technical Trading Systems. The True Range indicator is the greatest of the following:
- Current high less the current low
- The absolute value of the current high less the previous close
- The absolute value of the current low less the previous close
The Average True Range is a moving average (generally 14-days) of the True Ranges and 14 periods is its standard setting in the majority of charting platforms available. It has various uses in trading, especially for setting stop losses and for measuring the volatility and potential targets during trading. I want to draw your attention to its use as a timing tool.
As we know, one or many advantages of trading Forex is that it offers a wide array of currency pairs to trade and is pretty much a 24-hour market, therefore offering a wide array of opportunities across the trading day. One aspect to pay close attention to, though, is the time of day which you choose to trade a particular pair. There are four main time zones or trading centers around the world, which are the Sydney Session, the Tokyo Session, the European session and lastly, the New York Session. Because of these four main sessions, we as Forex traders can enjoy a variety of times to execute our trades. However, part of the risk management process should pay respect to the fact that there are good times of the day to trade certain pairs Intraday, and bad times as well. It is vital to know when these are and implementing a simple technical tool such as the ATR can help us in this deduction process.
What we should look for with regards to the ATR is for times of the day when we get a higher reading on the indicator, which suggests that the market is increasing in volatility. It is during these periods when a trader has a higher probability of achieving trade success. I am not saying that we should only enter trades when volatility is high, though, as this is a dangerous process due to the fact that we will always be late to the move and consistent market speculators are always first in line to buy or sell and look for the volume to come in after they have taken their positions. Rather, we are looking for a general indication of when market volume starts to pick up, as this can give us subtle clues as to when the best times are to look for our trades.
Firstly let's take a look at a week of EURUSD activity:
Figure 1
As we can see from the above chart, I have placed a simple ATR indicator onto a 30 min chart of EURUSD and marked off a whole week of trading activity. Notice how the ATR generally begins to slope upwards from around 10am GMT most days of the week? This implies that volume and activity is coming into the market and it is around this time where EURUSD is an ideal pair to trade as there are decent moves which take place. Volatility sharply drops off towards the end of the day telling us this is by far the worst time to take new trades on the pair. No surprises that around 10am is an ideal time as this suggests that the European traders and American traders alike are active in this pair throughout the European and New York Sessions.
Next we have NZDJPY which tells a different story:
Figure 2
In this example, we can see a very different picture with an increase in volatility happening on this currency pair from around 2am GMT, which is during the crossover of the Australasian and Tokyo Sessions, once again suggesting that like our previous example, specific traders like to trade their domestic currencies, in this case the Japanese Yen and the New Zealand Dollar. If you are looking for overnight opportunity, then this may be the pair for you (depending on your time zone!).
Finally, we have the GBPCHF, which enjoys characteristics of its very own:
Figure 3
Being a European-only pairing, this instrument attracts more players based in Europe, and taking into account that Central Europe is a little ahead of GMT, we can see that volatility dramatically increases from around 7am GMT, highlighting more trading setups. This activity also falls off around 4pm GMT, as the vast majority of these traders are finished for the day around this time, suggesting that this is the time to leave trading GBPCHF well alone.
It is my hope that with this article, I highlighted one of the many uses of a simple yet powerful resource such as the ATR indicator as it is important for any new trader to understand that complete risk management comprises of not just using stop loss orders, sticking to a trading plan and following rules, but also requires good timing to trade at only the safest and most liquid times of the day. The complete trader looks for balance in his or her approach to the market and the use of an indicator in the right manner can be a significant part of this process. On a personal note, I would like to thank my fellow Online Trading Academy Forex Instructor and good friend Steve Beaumont for his input on this article.
All the best and take care,
Sam Evans sevans@tradingacademy.com
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