Most traders are familiar with the typical daily ebb and flow of trading volume in the forex market. We know that volume typically peaks in the 9 am - 10 am hour (New York time, which is GMT-5 during winter), and typically reaches its daily low point in the 5 pm - 6 pm hour (NY time).
The daily low in volume just after 5 pm each day is illustrated in the chart below. The chart shows tick volume on the USD/CAD one-hour chart for Monday through Friday of last week. More on the subject of tick volume in a moment.
In this chart, notice that “Monday” is defined as 5 pm Sunday - 5 pm Monday; “Tuesday” is defined as
5 pm Monday - 5 pm Tuesday; etc.
Many of us who swing-trade use end-of-day (EOD) technical analysis, and we typically define the end of the forex trading day as 5 pm (NY time). This is the time of day when we gather the EOD data we use in our analysis.
We expect the market to be very calm at this time of day, and usually it is. But, not always.
A particular type of volatility risk exists at this supposedly quiet time of day, and it has been given a name: Twilight Trading Hour Risk. I was surprised to read about this “risk”, and you might be surprised, as well.
Here’s an ARTICLE on the subject published last Wednesday in LeapRate, which attributes the recent Japanese Yen Flash Crash to this specific risk.
More on tick volume –
We know that tick volume, as reported by large brokers, is a valid proxy for actual dollar volume in the forex market – despite the fact that disputes regarding that validity arise occasionally in this forum and in other forex forums.
Mathematical analyses have been performed to establish the degree of correlation between tick volume and actual (dollar) volume. These analyses are more sophisticated than anything ever attempted in this forum, and the results indicate correlations in excess of 0.9 (that is, greater than 90%) for all of the major currency pairs. Here’s a REFERENCE for those wishing to delve into this.