DAILY COMPOSITE CHARTS
Refer to Chapter 2, Tools of the Trade, for a detailed description of both daily and
weekly composite charts
The time frame in the following charts (Figures 6.1 through 6.9) spans 1/1/2005
through 4/14/2006. Daily composite activity charts are calculated by averaging the sum of the upticks and downticks over that period using one-minute time intervals. Their purpose is to assist traders in determining when to schedule online trading sessions based upon traders’ predilection to the nebulous risk/reward factor and the volatility of the targeted currency pair.
The vertical numeric scale on the right of each chart is activity expressed in total
number of ticks (upticks plus downticks) during each time interval. The bottom band
(the darkest) represents the activity for the current one-minute interval. The central band plus the lower band represents 3-minute activity. The sum of the all three bands represents the 5-minute activity.
A close inspection of the composite charts above reveals that each daily chart is
unique. This can be primarily attributed to intervention and to the fact that various regulatory agencies schedule their news releases on different days of the week, and at any time between 8:30 A.M.ET and 4:00 P.M.ET (usually). Without invention, these charts would most likely exhibit a smoother, less “spikey” behavior.
CAVEAT
Traders should be aware that starting around 3:30 P.M.Eastern Time, many currency
brokers begin gradually increasing their transaction costs. One NY broker raises the
EURUSD transaction cost from its standard 3 pips to 5 pips. Shortly after 4:00 P.M., this is again incremented to 7 pips then 10 pips by 4:30 P.M.Unless traders intend to stay in an open position over the weekend and risk rollover charges, they should liquidate all trades prior to 3:00 P.M. Friday Eastern Time. It is possible, for whatever reason, to trade over the weekend, but the high transaction costs and lack of volatility usually defeat the prospect of any profitability.
Additionally, traders should also be aware of another phenomenon which, though it
occurs very infrequently, can have a very damaging effect on placing orders. The transaction cost may spike wildly without warning and for no apparent reason.
Currency brokers protect themselves whenever the electronic order book becomes lopsided. Thisbook is a list of the incoming trades at the lowest level. Normally, buy orders must be offset with corresponding sell orders of the same quantity, thus maintaining a state of equilibrium (in futures contracts, this equilibrium is rigidly enforced; a long always has a corresponding short). If the number of incoming buy orders far exceeds the number of incoming sell orders (or vice versa), the broker may increase the bid-ask spread to ensure liquidity and to avoid brokerage house losses.
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