Using time-of-day market analysis to improve your trading odds and profitability

I've periodically wondered if there are certain hours of the day whose trading activity acts as a microcosm of trends for that day. Is it possible to predict the market trend for a 24 hour period based on the price behavior from just one hour of the day? Obviously this could be a big help in placing trades and saving time, since you'd be able to place day-long trades after observing just one hour of the day. Since a major goal of mine is to reduce the amount of time I need to look at forex charts and data to a minimum, I decided to take a look at whether market activity during certain hours of the day could yield any clues as to how I should be trading that day - and I discovered some interesting correlations.

All my initial studies were of the EUR/USD pair over a period spanning six months, followed by further testing via FX Engines over a 2 year period. I then tested the EUR/USD results on the GBP/USD, and found the hourly correlations translated to that pair as well. The basic question I asked was: if the market is up in hour X, will it be up 23 hours later, at the end of the 24-hour period commencing with hour X? Or will it be down? And if the market is down at the end of hour X, will it be down 23 hours later, or up? You get the idea.

Most hours of the day proved to be uncorrelated to any particular market direction. However, a handful really jumped out at me for being closely correlated to the day's trend, either directly or inversely. Here they are - keep in mind the correlation isn't 100%, but a tendency in one direction or the other:

Direct correlations

8 am - 9 am, US EST: hourly uptrend correlates with an uptrend for the day (that is, the following 23 hours). Hourly downtrend correlates with a downtrend for the day.

8 pm-9 pm, US EST: Hourly uptrend correlates with an uptrend for the day. Hourly downtrend correlates with a downtrend for the day.

12 midnight - 1:00 am, US EST: Hourly uptrend correlates with an uptrend for the day. Hourly downtrend correlates with a downtrend for the day.

Inverse correlations

6 pm-7 pm, US EST: Hourly uptrend correlates with a downtrend for the day. Hourly downtrend correlates with an uptrend for the day.

2 am-3 am, US EST: Hourly uptrend correlates with a downtrend for the day. Hourly downtrend correlates with an uptrend for the day.

4 am-5 am, US EST: Hourly uptrend correlates with a downtrend for the day. Hourly downtrend correlates with an uptrend for the day.

I'm not sure why these correlations exist, or seem to exist, but my guess is it involves market openings in Asia, Europe or the US and the times during which trends are established and then reacted to or corrected for. Perhaps a strong Asian opening then leads to a correction in the 6 pm period, which then reverses back to the original direction - hence the inverse correlation.

The most important practical effect of this research is that it's allowed me to create my most profitable FX Engines yet - and not just for the EUR/USD pair, but for the GBP/USD as well. For example, I created a long GBP/USD engine that is triggered by an uptrend in the 8 am-9 am period, and in backtesting it surpassed the results of my next-best GBP/USD engine by over 500 pips. I also created a EUR/USD engine that places long trades based on downtrends in the inversely-correlated 2 am-3 am period, which surpassed my best EUR/USD engine by close to 1000 pips.

Of course, it's impossible to say whether these engines will continue to be profitable in the future, but initial results based on these time-of-day studies are extremely promising. Hope you find them helpful as well!