Daily Highs and Lows - the importance of the first hour?

I've spent the last few weeks analysing the daily highs and lows of other pairs, and made an interesting observation. The 'midnight hour', or the first hour of the day, tends to contain the day's high or low. 

The following charts the distribution of the daily highs and lows for the USDJPY, AUDUSD, EURJPY, EURAUD, AUDNZD and EURUSD. I primarily focused on AUD and JPY pairs, being based in Australia.

If you look at the charts below, the midnight hour features prominently. 

This observation seems to hold true with the EURUSD, a non-Asian pair, although it isn't the most prominent in this case. 

My guess is that during a strongly-trending market, it's possible for price to move in one direction for the entire day, hence the prominence of daily highs and lows during the first hour. If you're daytrading an Asian pair, the high or low of the first hour looks like a good place to put your stop loss.

Distribution of AUDUSD's daily highs and lows

I spent today analysing the AUDUSD's daily highs and lows, and where we'd often find them over a 24 hour period. 

I looked at data from late October 2012 to February 2014. This is the distribution of the currency pair's daily highs and lows, sorted by hour. Just like the USDJPY, the daily highs and lows seem to be concentrated towards the start of the day, before the Tokyo session and during the first few hours of the Tokyo session. We then see a concentration during the US session, especially during the European / US overlap. 

What is the probability of finding a daily high OR low within each hour?

Overall, the results are similar to the USDJPY, which was what I expected. Again, you can probably build some sort of breakout strategy based on the first 4-5 hours of each day.

Preliminary backtest results on new USDJPY system

I'm currently backtesting a new system based on my research here. In my last entry, I observed that the USDJPY's daily high or low was most likely to be established in the first four hours of each day.

Suppose we looked on the 4H chart and traded the break of the first 4H candle that appeared for the day, with our stop loss located on the opposite end of the candle?

Example setup:

I basically looked for small 4H candles at the start of each day (a 'small' candle being defined as a candle with a range less than 0.75 * ATR(30)). If we're going to trade the day's move, we want to be entering just BEFORE the move, not after, hence why I only looked to trade the breakout of small candles. If the candle's large, then the day's move has probably already started and you'll be entering late. 

My preliminary backtest consisted of 534 trades from April 2009 to yesterday. Where I set my profit target didn't seem to matter. All TPs showed profit. The best TP though, was 1.25R. This yielded a profit factor of 1.51, which is very good. 

This is the equity curve with a $25k starting balance, at 2% risk per trade. 

R^2 is very good, at 0.93. The max drawdown was 21%. 

I tested most of the data between April 2009 to yesterday. I hope to finish the entire backtest in the next few days. The signs are looking very good, though.

Further research on USDJPY's daily highs and lows

My research on the USDJPY's daily highs and lows has become very substantial. I've examined 509 days, from 7 Nov 2012 to yesterday (27 Oct 2014).

This is the distribution of the currency pair's daily highs and lows, sorted by hour. The distribution is heavily skewered towards the pre-Tokyo session, and the first few hours of the Tokyo session itself. The next significant cluster of daily highs and lows is around the European / US session overlap. I assume this is when the large Tokyo day positions are closed, taking advantage of the rush of liquidity from US and European customers. 

What is the probability of finding a daily high OR low within each hour?

The results of the table above is substantially different than the table in my previous entry, where I made a mathematical mistake (it's hard to explain - basically the table in my previous entry measured the distribution of daily highs and lows for each hour, rather than the probability of finding a daily high or low for each hour. For example, while the distribution of daily highs and lows should be roughly 50% for the first half of the day, and 50% for the later half of the day, the probability of finding a daily high or low in the first half of the day should be close to 100%. Likewise, the probability of finding a daily high or low in the later half of the day should be close to 100%). 

How can we use this information? As mentioned in my previous post, if you're day-trading, opening a position in the first 4 hours of the day would seem to be your best bet. You can probably design a system on the 4H timeframe, entering on the break of the first 4H candle of the day, with your SL on the opposite end of the candle (there's an approx. ~58% chance that the opposite end will be the day's high or low). Where you set your reward - that's for you to find out. :)

My statistics maths is a little fuzzy, but I believe the table above is correct. 

Research on daily highs and lows

I spent today researching the time where we can expect to find the daily high and low. If you have some idea on when to expect the daily high or low, then I expect that reversal signals will be more meaningful around this time. 

I focused on the USDJPY and examined 100 days (7 Nov 2012 to 29 Mar 2013), using data from IC Markets. For each hour, what's the probability of finding the daily high or low within that hour? (00:00 = close of NY)

There's a few interesting findings:

1. The hour 00:00 has the highest probability of containing the daily high or low.
2. 30% of daily highs and lows were created in the first 3 hours of the day.
3. 50% of daily highs and lows were created within the first 10 hours of the day.

The overall conclusion seems to be that if you're day-trading the USDJPY and intend to 'let your profits run' for the whole day, the best time to open your position would be within the first 3 hours. 

AUDUSD - 24 October 2014 - Daytrade #2

I violated a rule in this trade, which took place just after the Tokyo open. During volatile periods (for the AUDUSD, the first few hours of the Tokyo, European and Euro / US sessions), you should trade breakouts or their retracements. You shouldn't trade ranges, which are more suited to quieter times. 

Five minutes after the Tokyo open, I went long at a support level, expecting it to hold and continue the ranging pattern from overnight. Session opens are one of the most volatile times during the day, so this was foolish. Lesson learned.

AUDUSD - 24 October 2014 - Daytrade #1

I'm very much alive and kicking. I took a month off live trading after entering some drawdown. I then eased myself back in during Sept / October,  reviewing and designing new mechanical systems, but at this stage I'm very sceptical about pure mechanical trading. 

This was a trade I took some minutes ago on the AUDUSD just before the Tokyo open. Price is still ranging within the S/R boundaries of the overnight session. I went short at resistance after spotting bears moving in on the 1M chart. When price moved to 1R, I moved my stop loss to a little over breakeven to cover transaction costs. Price rebounded upwards from 1R and took out my stop loss, so I exited at a very tiny profit. 

While I was trading, I was mindful of a big, high-volume bullish candle that had occurred a short while ago. It could be evidence of a future bullish breakout since the reaction off support was very strong and quick.

I'm still using a combo of a 5M and 1M timeframe. The 5M is used to identify overall price movement and mark S/R levels. The 1M timeframe is used to identify an entry point as soon as possible. All I'm looking for at this stage is some sort evidence of strength in the direction I want to trade (usually some sort of engulfing candle). I'm also trying to stick with limit orders to minimise slippage. 

I've also added a chart at the bottom showing the ASX200 for the AUDUSD, and the Nikkei 225 for the USDJPY, since there is some correlation between stock indexes and currencies. It's not a trading method, but just something to be mindful of.