How The Trading Day Actually Works
Even though they might be familiar with when the markets open and overlap, traders trend not to know how to read price action in relation to the hours of the new trading day, and how the dealers behind the desk do shift change.
Understanding the Trading Day: A Guide to Reading Price Action and Shift Changes
The trading day can be divided into three main sessions: the Sidney/Asia session, the London/Europe session, and the New York session. Each session has its own unique characteristics and trading opportunities.
During the Sidney/Asia session (8 hours), the market tends to form candlestick patterns and trend setters, making it challenging to make significant profits.
This is because investors in Australia and Japan take early speculative positions, leading to smaller overall price spreads and larger trading spreads.
However, there are opportunities to make big moves later in the week.
For example, when the Nikkei fails, it can negatively impact JPY imports and exports, affecting surrounding currencies that rely on JPY's economy.
Shift changes occur between 3:00-3:30 AM ET NY, when the Asia dealer is relieved and the London dealer takes over. During this time, they discuss orders, trapped money, and instructions for the next trading period.
By 3:45 AM ET NY, a move often responds to a particular setup, which can be traded using the double top or bottom formation on the M15 chart. This setup involves a breakout in a single direction, followed by three pumps, and a potential 50 pip gain with a 23 pip stop loss.
To take advantage of these opportunities, traders should focus on the M15 chart and look for candlestick patterns such as hammers or dojis. Confirmation of the trade can be achieved by breaking and closing above the high of the candle.
The next shift change is New York and so from 9:00 Am - 9:30am the London guy speaks to the NY guy and tells him to either continue or reverse course. Usually, they reverse what is going on, which usually leads to the continuation of the current longer term trend.
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Key statistics and facts:
- The Sidney/Asia session is characterized by smaller overall price spreads and larger trading spreads.
- The Nikkei's failure can negatively impact JPY imports and exports, affecting surrounding currencies.
- Shift changes occur between 3:00-3:30 AM ET NY, when the Asia dealer is relieved and the London dealer takes over.
- The double top or bottom formation on the M15 chart can be used to trade the breakout and potential 50 pip gain.
- Candlestick patterns such as hammers or dojis can provide confirmation of the trade.
By understanding the trading day and its unique characteristics, traders can improve their skills and make more informed decisions in the market.
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NOTES: If the Nikkei 225 index fails, it can have a negative impact on several surrounding currencies, particularly those that are heavily influenced by Japan's economy or have a significant trade relationship with Japan. Some of the currencies that may be affected negatively include:
Japanese Yen (JPY): As the Nikkei 225 is a key indicator of Japan's economy, a decline in the index can lead to a weakening of the JPY. This can make it more expensive for Japan to import goods and services, which can have a negative impact on its trade balance.
Australian Dollar (AUD): Australia is a significant trading partner of Japan, and a decline in the Nikkei 225 can lead to a decline in Australian exports to Japan. This can have a negative impact on the Australian economy and the value of the AUD.
New Zealand Dollar (NZD): New Zealand is also a significant trading partner of Japan, and a decline in the Nikkei 225 can lead to a decline in New Zealand exports to Japan. This can have a negative impact on the New Zealand economy and the value of the NZD.
Korean Won (KRW): South Korea is a significant trading partner of Japan, and a decline in the Nikkei 225 can lead to a decline in Korean exports to Japan. This can have a negative impact on the Korean economy and the value of the KRW.
Chinese Renminbi (RMB): China is a significant trading partner of Japan, and a decline in the Nikkei 225 can lead to a decline in Chinese exports to Japan. This can have a negative impact on the Chinese economy and the value of the RMB.
It's worth noting that the impact of a Nikkei 225 decline on these currencies can vary depending on a range of factors, including the underlying economic conditions in each country, the trade relationships between Japan and other countries, and the monetary policy decisions of central banks.
Economic Indicators:
-GDP (Gross Domestic Product): Measures a country's overall economic growth.
-Inflation Rate: Measures the rate of change in prices of goods and services.
-Unemployment Rate: Measures the percentage of the labor force without jobs.
-Interest Rates: Set by central banks to control inflation and economic growth.
-Trade Balance: Measures the difference between a country's exports and imports.
Country-Specific Factors:
-Australia's Gold Reserves: As you mentioned, Australia is a significant gold producer, which can impact the gold market.
-Canada's Oil Exports: Canada is a major oil producer, and changes in oil prices can affect the CAD.
Other country-specific factors, such as:
-Agricultural production (e.g., Brazil's soybean exports)
-Manufacturing output (e.g., Germany's automotive industry)
-Tourism (e.g., New Zealand's tourism industry)
Global Factors:
-Global Economic Trends: Understand the overall state of the global economy, including growth rates, inflation, and trade tensions.
-Geopolitical Events: Events like wars, natural disasters, or political crises can impact currencies.
-Central Bank Policies: Understand the actions of major central banks, such as the Federal Reserve (Fed) in the US, the European Central Bank (ECB), and the Bank of England (BoE).
Market Sentiment and Psychology:
-Understand how market participants, including traders, investors, and institutions, react to economic data and events.
-Recognize the impact of sentiment on currency prices, such as:
-Fear and uncertainty leading to increased risk aversion
-Optimism and confidence leading to increased risk-taking
Technical Analysis:
-Learn to read charts and identify patterns, trends, and support/resistance levels.
-Understand how technical indicators, such as moving averages, VOLUME, and Bollinger Bands, can help identify trading opportunities.
Fundamental Analysis:
Study the underlying economic fundamentals of a currency pair, including:
-Supply and demand imbalances
-Interest rate differentials
-Trade balances
-Economic growth and inflation rates
News and Events:
Stay up-to-date with news and events that can impact currencies, such as:
-Economic data releases (e.g., employment reports, inflation data)
-Central bank decisions and statements
-Geopolitical events (e.g., wars, natural disasters)
-Corporate earnings reports
Risk Management:
Understand how to manage risk in your trading, including:
- Position sizing
- Stop-loss orders
- Leverage and margin requirements
- Diversification and hedging strategies
To become proficient in these areas, you can:
- Read books and articles on trading and economics
- Follow reputable sources, such as CNBC, Bloomberg, and The Economist ,The Economist
- Intelligence Unit (EIU): A leading provider of country risk ratings and economic forecasts.
- Moody's Analytics: A leading provider of economic and financial data, with a strong reputation for accuracy and reliability.
- The Conference Board: A non-profit research organization that publishes economic and business research, with a strong reputation for objectivity and expertise.
- The World Bank: A leading international financial institution that publishes economic and development research, with a strong reputation for expertise and objectivity.
- The International Monetary Fund (IMF): A leading international financial institution that publishes economic research and forecasts, with a strong reputation for expertise and objectivity.
- Join online communities and forums to discuss trading and economics
- Take online courses or attend seminars on trading and economics
- Practice trading with a demo account or a small amount of capital
Remember, trading is a complex and dynamic process. It's essential to stay informed, adapt to changing market conditions, and continually improve your skills and knowledge.