This article really should be called “When Should You Trade?.” As you have probably figured out from your forex research you can trader forex 24 hours a day/5 days week.
Now, just because you can doesn’t mean that you should. There are certain times that are conducive to trading and other times not so much.
Why? It has everything to do with volatility and liquidity, which simply means there are more traders active within that time frame.
If there are more active traders who are placing traders i.e. affecting the direction of price on a particular currency, that means there is a chance of solid trend developing instead of price endlessly whipping back and forth in a range.
Know the Markets
The trading week officially begins at 6pm EST on Sunday and runs until 4pm on Friday.
As discussed above, high activity and volatility times are often the best times to trader. When only one market is open, currency pairs tend to get locked in a tighter price ranges of roughly 30 pips of movement. Two or more markets open at once can easily see large sets of pip movements and a greater likelihood for decent trends to develop.
First, here is a brief overview of the four markets (hours in EST):
- The New York Session (open 8am to 5pm): Movements in the NYSE (New York Stock Exchange) can have an immediate and powerful effect on the dollar. When major market news breaks, the dollar can gain or lose value instantly.
- Tokyo (open 7pm to 4am): Tokyo takes in the largest bulk of Asian trading, just ahead of Hong Kong and Singapore. It was the first Asian trading center to open. The best currency pairs to aim for, if you are looking for volatility, would be USD/JPY, GBP/CHF and GBP/JPY. The USD/JPY is an especially good pair to watch when the Tokyo market is the only market open because of the heavy influence the Bank of Japan has over the market.
- Sydney (open 5pm to 2am): Sydney is where the trading day officially begins, and while it is the smallest of the markets. It sees a lot of initial action when the markets reopen on Sunday afternoon because individual traders and major institutions are looking to make a move based off what the market may have done when it closed on the previous Friday.
- London (open 3am to noon): London is the epicenter of all currency trading and accounts for over a third of the global trading market, (source: IFSLondon). The city also has a big impact on currency fluctuations because the Bank of England, which controls the interest rates and the policy surroundings of the GBP, is based out of London.
Overlaps in Trading
The best time to trade is when there is an overlap in trading times between open markets. Overlaps means more traders being active which means more opportunities for you to find profitable setups. Here is a closer look at the overlap sessions in the forex market.
- U.S./London (8am to noon): The heaviest overlap within the markets occurs in the U.S./London markets. If a trader is looking for the most volatile time to trade, than this would be the ideal time.
- Sydney/Tokyo (2am to 4am): This time period is not as volatile as the aforementioned, but it still offers a chance to trade in a period of higher pip fluctuation. The ideal currency pair to aim for would one of the many Yen influenced currencies especially, GBP/JPY or the EUR/JPY.
- London/Tokyo (3am to 4am): This overlap sees the least volatility as most U.S. are in bed at this time. Not only that but with only 1 hour of overlap you are not really guaranteed to see much action.
With this information in mind start to think about your trading plan and what might be the most opportunistic time to trade for you. It could very make the difference between profitable and not profitable trading.