[B]Liquidity, Price Movement, and Trading Volume[/B]
It’s generally accepted that [I]resting orders[/I] (limit orders and stop orders) constitute [I]liquidity[/I] in the market. If you choose to enter or exit the market immediately (on a market order), that liquidity is available to fill your market order instantly. And the ability to transact market orders (get filled) immediately is not only demanded, but almost taken for granted, by traders. So, the presence of available liquidity is an important factor in deciding when to trade and what to trade.
Price seeks liquidity. Market-makers push prices up or down to capture the liquidity required to complete transactions. This price movement, in turn, attracts additional liquidity. So, a virtual cycle is set up in which liquidity generates price movement, and price movement generates liquidity. Speculators (ourselves included) seek profit opportunities amidst this price movement and liquidity.
The trading activity — which is attracted to periods of liquidity and price movement — manifests itself as (1) tick-volume (incremental price changes, up or down), and (2) true volume (measured in dollars, euro, sterling, etc.). And, as has been documented, tick-volume (which can be measured directly) and true volume (which cannot be measured directly) tend to move in tandem.
In other words, a graphical representation of [I]tick-volume[/I] (with absolute numbers attached to each period) is also a graphical representation of [I]true volume[/I] (without numbers).
Factoring volume together with price movement and liquidity creates a larger virtual cycle in which liquidity generates price movement, which in turn generates trading volume, which in turn generates liquidity. So, a graphical representation of tick-volume (in real terms) can now be interpreted as a graphical representation (in relative terms) of either true volume or liquidity.
If our common tick-volume charts are also depicting the rise and fall of liquidity over time, then a [I]typical[/I] tick-volume chart will show us the [I]typical[/I] rise and fall of liquidity over time. Our only task now is to identify a [I]typical[/I] tick-volume chart — that is, a tick-volume chart which depicts the [I]mean[/I] to which daily variations in tick-volume tend to [I]revert.[/I]
I have selected one such [I]typical[/I] tick-volume chart as the starting point for plotting trading sessions based on liquidity. I didn’t use any sort of rigorous mathematical technique for determining that daily variations in tick-volume tend to revert to this particular chart as their mean. Instead, I simply relied on what I’ve been observing during years of looking at charts. You might choose a different tick-volume chart to represent what’s typical, or average; but, I think that your choice would not be very different from mine.
[B]Liquidity and Trading Sessions[/B]
If periods of high liquidity are typically also periods of large price moves, and if we are seeking these periods as preferred times to trade, then we can use our tick-volume charts to point us to those periods. The “typical” tick-volume chart which I have used as the basis of my trading-session system clearly has four distinct time periods, representing four distinct waves of tick-volume, true volume, and liquidity. My system simply brackets and labels these four time periods.
The four time periods in my system resemble (roughly) the Tokyo, London, and New York sessions displayed in many other trading-session systems, with some key differences: (1) the Tokyo Session begins and ends at slightly different times, although the 9-hour duration of this session is fairly common, (2) the London and New York Sessions each begin an hour earlier than in most other systems, extending each of them to 10 hours, (3) the 10-hour London session is divided into the London Morning Session and the London/New York Overlap Session, each 5 hours in duration, and (4) the 10-hour New York session is divided into the London/New York Overlap Session and the New York Afternoon Session, each 5 hours in duration.
[B]Notes on the Trading Session Chart[/B]
The charts in post #2 were constructed on EUR/USD 30-minute tick-volume charts covering two periods: (1) from 5pm (NY time) on April 6, to 5pm (NY time) on April 7, 2016; and (2) from 5pm (NY time) on January 14, to 5pm (NY time) on January 15, 2016. These particular tick-volume charts were selected because they display a fairly typical pattern of tick-volume (and, thus, liquidity) over a 24-hour period.
Relying on liquidity to define the forex trading sessions produces a system which differs somewhat from everything else out there — including the 4-session system presented in the School of Pipsology. Accordingly, the system presented here may, or may not, appeal to you.
If it does appeal to you, it’s yours to do with as you see fit.
If it doesn’t appeal to you, that’s perfectly fine. You have other choices. In addition to the system presented in the [I]School,[/I] there are several other systems worthy of your consideration. In particular, the 3-session system presented by John Kicklighter from [I]DailyFX,[/I] is worth a look.
Your comments are welcome.