One of the lessons I learned as a newbie over 11 years ago; never to trade during the ‘dead zone time’.
Having invested in my trading education, my trainer at the time mentioned the dead zone but didn’t understand the language as I was new to trading.
In this post, I will explain exactly what the dead zone means, and it may affect your trading account balance due to what happens during this time of the night.
Well, let me take a few minutes of your time to explain no trading during the dead zone... And I'm not talking about Stephen King or gaming!
Firstly, during this time trading is reduced as not many traders are at their desk. The European and US markets are closed due trading desk closed, whereby traders have gone home (banks, fund manager and other traders).
While the market is open, it’s important for you learn how to plan your trades in advance to avoid trading around this time. Once you have planned your trade to execute, rather than rushing into the market because you see the price moving, take some time to analyse the market.
Provided, you plan to place an entry in the market to buy or sell a particular currency, e.g. Buy GBP/USD at 1.2960 ensure your entry happens before and after 10:00 pm to 11:00 pm. During this period, there is an overlap when US market close and the Asian market starts. Caution needs to be applied during this time as the market sometimes be risky.
The overlapping may cause price movements from one price to the next sometimes above 20 – 100 pips or more. Often this is referred to as a spike, fat finger, in the market. In addition, the broker may increase the bid and ask price of a particular currency, which is called the spread.
In a normal active market, the spread of the eurusd may be below £1 per pip, this could increase to £5 or £10 per pip during the ‘dead zone’
Which means as press the buy or sell button or place an entry order in advance to execute the trade, your account may be negative instead of in profits. There are several reasons why this happens which are explained below low liquidity and algorithmic trading.
Low Liquidity
One of the reasons why the trade you planned or executed via a buy or sell order may end up in losses instantly may due to ‘low liquidity’. As the market closed for European (5pm GMT) and US (9pm GMT), fund managers, banks and other institutional traders have gone home.
This would cause the market to have less trading that is classed as ‘low liquidity or volume’. In addition, retail traders are trading less as well. If you observe price action and movements on the charts, the candlesticks are much smaller. The example below indicates low volume regarding the candlesticks size compared to a normal active trading day (european and US sessions).
EUR- USD OPPORTUNITIES
On the 29th of December 2016, just a day before the market closed until the New Year 2017, there was low liquidity (volume) in the market as traders were focusing on taking their New Year’s break.
During this day, I identified the EUR-USD opportunity as the market has been consolidating for the last seven days and trading sideways. As one of my strategies in my Forex Trading Programme, where i show you how to to trade the consolidation breakout to increase your account by 1% – 3% or more.
In addition, all my students apart of the programme received trade signals (Mastermind Weekly Trade Signals). These weekly trade signals equates to over 100 pips per week.
Market Glitch / Flash Crash
There has been an increase in algorithmic trading over the years by 7% in 2014. Some traders in particular banks and institutional traders have opted to execute trades through algorithmic trading or black box. This allow traders to execute trades quickly with less supervision.
In 2010, Waddell & Reed Financial, Inc developed an algorithmic software that caused the DOW sold off (sell order) by 1,000 points, this netted $40 million in profits. Image companies in particular fund managers and banks on the other side who where buyers would have lost money in the market.
Overnight during Brexit, some traders experienced profits and losses, as the British Pound dropped by 6% in two minutes. This has been the lowest price level the pound has traded for 31 years. The time of the day have a great influence on the market due to low volume (liquidity).
Traders especially retail traders like you and I who don’t with an algorithmic system are more at a disadvantage during the ‘dead zone’, therefore it’s important to trade when most markets are open.
In 2016, the EUR/USD (euro against US dollar) rose from 1.0580 to 1.0652 price level an increase of 150 pips Due to flash crash/algorithmic trading stop loss were triggered for traders. These spikes are usually short-lived. There was a similar event in October 2010, the British Pound dropped by 10%, then recovered.
Trade without Emotions
After planning the EURUSD trade, buy (long) above 1.0498 price level. One of the biggest challenges as a trader is not to get too emotionally connected with any trade. Being too emotional with the trade you place whether to buy or sell can cause the following:
- Closing the trade prematurely
- Move your original stop to breakeven as you are not giving the trade room to work
- Increase your risk as you move your stop lower because the trade is going against you
As I waited for the Asian session to start, checked my laptop to see the current price of the eurusd, only to noticed there was no longer an order placed in my trading account.
Again, checked my trading account history to ensure sure the broker didn’t ‘kick me out’ of my trade. Guess what? The market spiked up and closed my trade for profit 144 pips in my favour with profits.
In view of the above, the market is unpredictable. Therefore plan your trade in advance and not jumping into trades based on emotions or seeing a sudden spike or movement in the market to the upside or downside.