The Asian Session and Market Efficiency

It is quiet curious how most people believe that taking profits from the forex market is so easy. In fact, most people think that it is easy to make profits of even 20 or 50% each month in the forex market. This makes people go in the search for holy grail automated trading system that can achieve them these targets for several years. Unluckily, formal economic theory tells us that not only is it extremely hard to make ANY profit, it is even in dispute if ANY profit can be made consistently at ALL. Why is this ? The problem is related to what we call, market efficiency.

In an efficient market, price reflects all the information available to traders so there is no possible decision a person can make that can consistently give profits because of the adaptability of the market against any possible strategy. This theory assumes that there is no possible strategy a trader can make to take money out of the market consistently. In the end, the trader will lose money because of the commissions (spread in the case of forex) that has to be paid to enter and exit the market since his strategy does not give any overall profits.

Economists have battled for the last 30 years to show both sides of the story. Is the market efficient or is it not ? Right now, after much research, it has been shown that the market is not totally efficient in the sense that some trading strategies have shown to give consistent profits in studies and the fact that successful commodity and stock traders exist also show this fact to be true.

However this does not mean that the market is totally inefficient. The market will react to massive exploitation of inefficient behavior something which will change market behavior. This leads me to my example, the Asian trading session.

Throughout the last year or two, people realized that the Asian trading session was very flat in pairs that were not being traded. For example, the EUR/GBP, EUR/CHF, etc, behave in a flat manner during the Asian trading session. This lead some people to build scalping and other alike trading strategies to try to get profits out of the random movements during the flat periods in the Asian session. What happens when a lot of people start to exploit a behavior of the market that seemed predictable ?

What happens is pretty straightforward. People start entering trades in a session in which the market is flat in some pairs due to the closed status of some markets. However, by entering trades at this time, people introduce liquidity to the market, which in turn causes prices to change, which in turn causes short term movements to develop and volatility to increase. If you check out the Asian trading session on the EUR/GBP during the past few months, you will notice this phenomena happening. As more people try to exploit the before predictable “flat” behavior of the pair during the Asian session, the pair has changed its trading behavior. The market has become efficient and the exploitation of the former flat range for profit is now extremely difficult because of the higher volatility that is now experienced more and more frequently during this session.

In fact, you will notice with time that the strategies that do achieve consistent profits are extremely hard to trade psychologicaly for the trader, so they are in this sense “protected” from massive exploitation. This is why the turtle system continues to work after 30 years, it is a very good, but extremely hard to trade system, as well as the god’s gift ATR and other long term profitable systems. If you would like to learn more about these systems, why they are so hard to trade, why they are long term profitable and how you too can start trading and designing and programing your own long term profitable strategies please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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