2017 was a glorious year. The whole market skyrocketed. From initial total market cap of 17 billion it rose as high as 827 billion – a 4864% increase and life-changing gains for anyone involved. What a ride.
Such a run couldn’t be unnoticed. We asked for mass adoption and attention and we got it – regulators and institutional investors came out of the dark and joined our little party.
The market matures day by day. Every week there are some regulation news coming from all over the world; Crypto Hedge Funds and Investment funds are growing like mushrooms meanwhile Bitcoin price is rapidly dropping – since the peak of December 17th it had dropped by 70%.
The retail trading becomes harder and harder – and not solely because price is falling and people are slow to adapt to the bear market. The complication of trading is a direct consequence of smart money entering the space. It’s not a joke that around 90% of traditional retail traders go broke at some point; cryptocurrency markets are much more forgiving at the moment, but it’s subject to change.
Here is a famous “Bart” pattern – a result of some kind of algorithm taking advantage of over-leveraged traders. It has only existed for just for a couple of months but it has already become a meme and source of frustration for many traders in the crypto space. It is just the first step, a small quirk which makes gamblers unprofitable. You have to expect smarter money to further decrease your trading edge using high-frequency algos, price manipulation, insider trading and much more.
But all these institutional investors come from traditional financial markets; thus we know what rules they are playing by. We know what we can expect. Forex and stock markets are known to have a strict schedule – most of the money is made on the open and close of the trading day on stock market and on the opens and closes of trading sessions on Forex market. Certain hours of the day provide the best liquidity and volatility and traders tend to build their schedule around them.
In this article I will dig into statistical analysis of the current downtrend – I want to know if Bitcoin price action had acquired characteristics of the Forex market. We will take a look at impact of days, hours and Forex trading sessions on the price action. All price action data was taken from Bitfinex.
Impact of trading sessions
Forex markets are known to be open around the clock, but each day is divided into trading sessions – Sydney session, Tokyo session, London session and New York session.
Each session provides different trading opportunities: for example, the London session intersects with both NY and Tokyo sessions, thus it is much more liquid and contains more action.
Also, each session has major trading pairs. For example, on Tokyo session JPY pairs are very active, but non-pacific pairs such as EUR/USD or USD/CAD might be very dry.
Finally, it’s common to see a small reversal at the end of each session because daytraders tend to lock in profits or cut losses (carrying positions overnight sometimes costs a fee).
As you can see, most of the trading happens to be on the London session, and many traders consider it to be the main session of the day. Does it matter? Absolutely. Why? Professional traders seek two things: liquidity and activity. Liquidity lets them work with minimal slippage and activity lets them make profit. In this case, the London session is great match for both parameters.
Do trading sessions have the same impact on the BTC/USD market? Do sessions have some kind of price directional bias? Which trading sessions are the most volatile? Which session provides the most liquidity? Are there any anomalies like price reversals at the end of sessions? Let’s find out!
Green vs Red
The first metric is quite simple – we consider the trading session to be “green” if the close of the last hour of trading session is above open of the first hour of trading session, and “red” for the opposite. Relation between number of green and red sessions might give a clue if certain trading hours have a directional bias.
Sydney and New York have a bit more “red” trading sessions, but given the sample size, this deviation is insignificant, and we can consider all sessions being equally neutral.
Quite a paradox – we are in a clear downtrend with the market losing 70% of its value but each session is as likely to be bullish as to be bearish. The answer to this paradox is obvious – bearish sessions tend to drive price down more than bullish sessions tend to drive price up. Selling is dominant in current market conditions.
Let’s take a look at what happens during these sessions.
On this chart the green column represents an average spread of “green” sessions; the red column is an average spread of “red” sessions.
Here are the first interesting findings. Out of 4 trading sessions the only truly neutral are New York and London – an average fall is just slightly stronger (1%) than an average rise. I’d say that it is quite an anomaly in the current state of the market.
Other sessions are much more biased:
- during a Sydney session an average drop is 39% stronger than an average rise
- during a Tokyo session an average drop is 52% stronger than an average rise
This chart contains average session High & Low spreads. If we come back to the Open & Close chart, we can see that an average O&C spread is close to 2%. In the case of High & Low this number is closer to 4%.
It means that Forex session behavior is indeed evident – price tends to reverse when a session is coming to the end. Such difference between High/Low and Open/Close spreads implies that traders are taking profits and cutting losses before a close of the session, causing appearance of short time-frame reversals.
Let’s take a closer look at it.
I’ve plotted cumulative returns of each trading session. Charts are messy and it’s impossible to see a pattern. The only thing to see here is anomalies or “tails” – spreads of 7-10% are quite rare and most of them appear on London and New York sessions.
To see if price really tends to reverse at the end of session let’s plot an average cumulative price movement inside each session.
Much cleaner picture! On average, lows or highs are printed just after the middle of the session. As expected, there is usually a small reversal at the end. We’ve seen above that Sydney and Tokyo sessions are much more biased, and now the difference is clear – bounces at the end of the sessions are not as strong there.
So what do we know by now? We are deep in the downtrend, London & New York sessions are pretty neutral, meanwhile Asian & Sydney sessions are bearish. Does it imply that one of the catalysts for current downtrend is Asian retail dumping? We can’t decide just yet, this puzzle misses one crucial part – volume.
Volume is tricky to analyze. Different exchanges are dominant in different regions, and some exchanges are known to be tampering with their numbers. I’ve decided to use the average of Bitfinex, Bitmex and Binance volume (though admittedly Bitmex might not be as suited for this type of analysis). Also it doesn’t account for the OTC market, and the rumors and whispers that it’s huge.
As it urns out, the London session is the most liquid one, with the New York session being a close second.
We may conclude that London and New York sessions are the best sessions to trade if you are a day-trader: both sessions are active, both are liquid, and open & close spreads are amongst the widest. There is a tendency to print highs/lows in the middle of the session as well. Additionally, if you take a look at “messy” cumulative returns chart, you may see that both NY and London sessions have more anomalies, or in other words, wide-spread sessions, which provide the best opportunities for traders who know what’s going on.
As an aside one can argue that Asian retail “dumping” is not an explanation for the current downtrend – even though Sydney and Tokyo have a bearish bias, volume suggests that most of the action (including bearish one) comes from the West.
Days of the week
Is there such a thing as optimal days of the week to trade? Is there any difference between them in relation to volume and average price movements? Is “Bloody Monday” a meme or reality?
First, to understand if days have any impact on the trading in more mature markets, let’s take a look at Forex statistics. Here is a chart of average pip movement during each trading day.
There is a clean pattern – markets tend to be sleepy during the weekend, waking up at the beginning of the week and most active during the middle of the week, with friday being a pretty volatile day – traders have tendency to close their positions coming into weekdays the same way as they do before the end of the trading session or the day.
Now, let’s take a look at BTC statistics.
Bloody Monday is a well-known meme in the crypto community. On paper it makes sense that mondays are choppy – banks are closed on weekends and people who want to cash out some crypto might want to wait for monday to do so, causing more selling and driving the price down.
Green & Red ratios show that on most Mondays price tends to go down, and Expected Price Change supports this claim showing that these drawdowns are quite volatile. Bloody Monday is indeed a thing. But Saturdays are equally abnormal – there were 18 green days and 9 red days. Saturday is a day of relief in the current bear market.
Our goal is to trade on days with most activity, and in this case the widest High & Low spreads happen to be in the middle of the week. Oddly enough, the same days have tightest Open & Close spreads.
It gives an amusing insight into the price action – we may conclude that most of the time whenever price rapidly drops or increases during the middle of the week it tends to reverse and create a candle with a relatively small body. Price action during Wednesday, Thursday and Friday has the same structure as in London and New York sessions. Candles with longer body tend to appear on the Weekends.
The daily volume graph shows a picture similar to Forex – the market is most liquid during the middle of the week with Sunday being the least liquid day. It also shows a clear divergence – we concluded that the worst drawdowns happen on Sundays and Mondays, but simultaneously these days are the least liquid.
So why are Mondays bloody? Let’s look at it from the institutional investors perspective. We know that they come from financial markets, so they tend to be more active during the middle of the week. Actions of these institutional investors tend to make the market more efficient – they use different techniques to profit from both sides of the market, providing both long and short liquidity and making money from small inefficiencies of retail traders. It follows then, that the rapid movement during Saturdays, Sundays and Mondays are simply the result of highly inefficient retail trading, including irrational dumps.
Here is a formalization of the statistics above: the main discoveries and how to apply them in your trading.
First, time is a scarce resource. There are objectively better times to daytrade – London and New York sessions are more active and it’s worth to structure a trading schedule around them. Tokyo and Sydney sessions, on the other hand, are less interesting – you probably shouldn’t extend your trading day to catch some extra moves. Resting and improving your game is an important part of the process and also requires time.
Then, London and New York trading sessions have an interesting structure – price tends to move in one direction, reverse, and bounce back in other direction at the end of the session. Daytraders are taking profits and cutting loses causing such a movement. Keep it in mind.
Finally, it’s worth to consider daily directional tendency – while sessions don’t have a clear bias, such days as Mondays and Saturdays are quite interesting – the green/red ratio is abnormal and looking for shorts on Mondays and longs on Saturdays might be a solid trading plan. Days in the middle of the week are the most liquid and active and you can trade them in any direction. Sundays are slow and illiquid – it’s a good time to rest before the next trading week.
Thank you for reading and good luck in the markets!