Best Time to Trade

WHEN IS THE BEST TIME TO TRADE?  

Remember I stated in Chapter 1 that traders need to ask more questions? Well, the more you learn, the more you know what to ask. As a systems trader, asking how a system performs during different times of the year is a novel idea, especially as seasonal forces can impact a market. Ask questions such as, “When is the best or the worst time to trade?” From a simple yet elegant standpoint, the answer for day traders in equities is lunchtime. This is substantiated by volume levels generally declining during that time frame. Forex traders note that trading activity is light from 10 p.m. (ET) until 1:30 a.m. (ET), as we discussed in Chapter 1. What about on a weekly or monthly basis? When does our system perform best?

By tracking trading performance, as shown in Table 11.3, from a historical perspective, we can form an opinion of when the system is at peak performance or when the market we are trading is in sync with seasonal factors. There is never a guarantee that past performance is indicative of future results, but we can and do benefit from studying history. Without a doubt, I do not want to go on a major tangent here; but we are trading in a new frontier environment. The new age of technology has more people trading online, and more people are more computer savvy. We have intricate globalization of our economy. Trading partners with China and even India is not like what we had just five years ago. So with that perspective, my opinion is that looking at seasonal tendencies of a market starting from 2000 up through 2005 would not be a huge statistical event, but it would be more relevant than a testing period in 1990 through 1995. With that in mind, we ran a test, as the results show in Figure 11.6, to see which months perform best with the “Defcon III model.”

Using the Genesis Software product and asking the right questions (e.g., When is the best time to trade?), I can get a reasonable answer. In fact, I wanted to know which months are the best and which months are the worst in which to trade. Using the Genesis Software, I can run backtests to see what the performance from a seasonal perspective with the Defcon system looks like on a monthly performance basis. Using a test period over the past three years, I am able to conclude that April is a month to avoid trading! Based on a three-year average, this is the month consistently delivers drawdowns. With that statistical information, I have a slight edge in the market, as it relates to my system. I can make a decision either to lower my contract sizes or to avoid trading entirely. Figure 11.7 shows the yearly breakdown of the compiled results.

The more statistics I have, the better prepared I am; and with that knowledge, I have stacked the odds in my favor. This is the ultimate in trading tools and system designs: being able to identify opportunities and discover the weakest link in my chain of the trading systems.

Table 11.4 dissects each month’s performance from the three-year test period which really shows the poor seasonal performance made in the month of April for those years back-tested.