Saturday, November 5, 2011

Filtering trades on XAU via time analysis

Yesterday was a really tough day on XAU. Until friday I was averaging more than 40 pips per trade on the XAU market. I decided to take a look at what was going wrong. The obvious was it was the first Friday of the month--this is usually an extremely low volume time to trade. It is often mistaken to be high volume but in fact the volatility skew on NFP days is due to a LACK of volume not a surplus of participants.

What I discovered over the past 30 days is that XAU has a very strong tendency to whipsaw at 3 intervals during the day. Note, all times are GMT +2.

The first, and perhaps most obvious was 12:00. This is when London is at lunch and NY is still in bed. Nobody should be trading signals at this time of the day. The second was the beginning of the afternoon session in London and NY is just waking up at 14:00. The consistency of the whipsaws was quite interesting. It's been common knowledge that market makers adjust prices rather violently when there is no news and their order books seem imbalanced. Best thing to do is to avoid signals which are created from this activity.

Avoiding these transitional periods in the XAU spot market added quite a return to the past performance for the last 30 days. Perhaps you too could benefit from observing what time of the day bad trades are coming in.

The other side of this coin is that the all time biggest winners will invariably come at the times most commonly creating bad trades. This is what the Black Swan theorists are always harping on about. Very low frequency returns will always outpace steady small profits. As a intraday trader, I cannot grab all of a move but I can take  what is obvious to me here and now. Once in a while I will nail those fat tail returns but it is best not to hunt for them like a hidden giant in the forest.

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