One neglected area of forex trading is the tendency for currencies to drift quietly at certain times of the day. This begs the question: Is it possible to use this less-obvious market tendency to our advantage?
After the U.S. forex trading session ends, but before the beginning of the Asian trading session, there is a stretch of several hours during which volume is typically low. This illiquid time of day begins around 5 p.m. ET. Although it is true that traders from Australia and New Zealand are active at this time of day, the “big three” centers of world currency trading — Great Britain, the United States, and Japan — are mostly dormant. It is during these hours that many currency pairs tend to drift aimlessly, and the low volume environment renders any movement — especially a breakout — highly suspect.
Why are breakouts that occur on low volume unreliable? In all forms of trading, a breakout that occurs on high volume is respected because when traders put real money into a market it shows a high level of commitment to that position. The increase in volume is a reflection of that commitment.
Because forex volume normally increases or decreases at certain times of the trading day, breakouts that occur during liquid periods are more reliable, while those during illiquid periods are much less dependable. Since any price move that occurs at this time (5 p.m. ET) is unreliable and likely to retrace, we can create a strategy that “fades,” or trades against, these false breakouts.
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