What is the best time to trade forex?
Table Of Contents:
- What is the best time to trade forex?
As forex traders, there might have come a time when you would have wondered what is the best time to trade forex. If you are asking this question, chances are that you might have noticed some periods when the markets barely move and times when there is a lot of action and volatility in the markets.
The forex or currency markets as you might know are one of the few financial markets that operate globally.
This means that you can trade the currency markets 24 hours a day and five days a week.
This gives the forex markets a unique advantage compared to other markets.
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For example, if you were to trade stocks, then chances are that you would most likely trade stocks during the business hours of your jurisdiction. Likewise, even the futures markets that are available to trade globally follow specific timings.
Each of the forex sessions that are available are given the same name as the place of business. As a trader, it is important to understand the forex trading sessions. This will allow you to understand the best times to trade forex.
You will also be able to fine tune your trading strategy and pick the most appropriate currency pairs to trade during one of the forex trading sessions.
With the forex markets this is not the case. In this article, we will take a look at the best time to trade forex and how this can be beneficial for you.
Can you trade forex 24 hours a day?
The simple answer is yes. Forex trading is available for trading twenty four hours a day and five days a week. While this might seem simple enough, making you to believe that you could trade forex anytime within the 24 hour time span, there are a few things to look into.
As a forex trader, you should be looking at the level of activity in the markets. Although the forex markets operate globally, not all time zones or sessions operate the same way.
There are a few forex sessions when activity is very low and there are times when activity is quite high. Trading volumes are key as a forex trader, especially if you day trade.
When volumes are high, you can expect to see more liquidity in the markets. This leads to easier buying and selling in the markets. The higher trading volume also has other advantage, which is the spread which reduces drastically during such periods.
Therefore, although forex trading can span across different time frames, as a trader you need to select the periods that offer good volumes and thus more activity and higher volatility.
What are the forex trading sessions?
A forex trading session is defined as the start and end period of a trading session. Depending on where you live, you will most likely fall under one of the forex trading sessions.
The forex trading sessions are primarily divided into three main types. Depending on what you read, you might find four trading sessions and at times five. However, for the sake of simplicity, we define our forex trading sessions into the following three sessions.
- The Asian session
- The European session
- The New York session
Let’s take a look at each of these sessions in detail.
The Asian forex trading session
The Asian forex trading session is also known as the Tokyo trading session. This is when the markets in Japan are active. Depending on what resources you look at, the Asian trading session can also include the Sydney trading session.
The Sydney trading session starts from 6PM through 3PM eastern time. Later, the Tokyo markets open from 7PM and continue through 4AM. As you can see, there is a strong overlap between the Sydney and the Tokyo session.
However,
in terms of market activity, the Tokyo trading session has more activity and volume.
The Tokyo or the Japanese markets are important in the global financial markets. One of the factors is that because this trading session opens after the close of the U.S. markets, the Tokyo markets can often mirror the market sentiment from the U.S. session or in some cases, the Tokyo markets can lead the European and the New York trading sessions.
The currencies that are most active during the Asian forex trading session are usually the AUD, NZD and JPY.
The European forex trading session
The European forex trading session can be divided into the London forex session and the Frankfurt forex trading session. While there is not much of difference between the two, the activity during the start of the Frankfurt trading session is much higher.
The London trading session is the first to start off and begins at 3AM all the way through to 12PM Eastern time. The Frankfurt session starts an hour earlier at 2AM and continues all the way through 1PM (just one hour ahead of the London trading session).
The London and the Frankfurt trading sessions together are the most active.
There is also an overlap between the Asian and the European trading session. For a few hours from 2AM Eastern time through the end of the Asian trading session at 4PM, you can see a lot of activity. At this time, the Tokyo markets, the London markets and the Frankfurt markets operate simultaneously.
This is when you can expect to see some increased levels of activity.
The currencies that are most active during the European trading session are the EUR, GBP and CHF. During the overlap period, you can see increased volumes in currency pairs such as the EURJPY, GBPJPY, EURAUD, CHFJPY and so on.
The New York forex trading session
The New York forex trading session is probably the most busiest of all. This is because of the fact that New York is the biggest trading hub when it comes to the global financial markets.
The New York trading session starts from 8AM and continues all the way through 5PM Eastern time.
Again, there are a few hours of overlap between the European trading session and the New York trading session. This happens between the times of 8AM through 1PM. During this time, the London, Frankfurt and the New York trading sessions all operate together.
The most active currencies during the NY trading session are the USD, CAD, MXN. Of course, during the overlap with the European trading session, you can find that the EURUSD, EURCAD, GBPUSD and so on are quite active.
While we have outlined the three main forex trading sessions, note that some of the markets might be closed due to local bank holidays. During such days, you can expect to see lower trading volumes. For example, volumes can dramatically drop during the NY trading session if the U.S. markets are on a holiday.
What are the best times to trade forex?
By now you have a rough overview of the different forex trading sessions. It should be obvious by now that the periods during the overlap of one forex trading session and another is the best.
This includes the overlap of the Asian and the European trading session and the overlap of the European and the New York trading session.
During these times, you can expect to see increased volatility and activity in the markets. Trading forex during these periods of overlap are the best for a number of reasons.
Let’s take a look at some of the reasons why it is best to trade forex during these periods.
Increased volumes = lower spreads
If you were trading with a variable spread broker, then the chances are that you might have noticed how the spreads widen during periods of low volatility. Due to low levels of liquidity, the bid and spread prices can vary greatly.
This leads to higher spreads. The spread is nothing but the fee you pay when you want to buy or sell a currency. Therefore, when the spreads are high, you pay higher fee. There is also a chance that the higher spreads can lead to unnatural tripping of your stop loss or take profit levels.
The spreads are move evident if you start looking at some lower volume currency pairs such as the GBPAUD, EURCAD and some exotic currency pairs such as the EURNOK, USDNOK, USDSEK, EURSEK, USDZAR and so on.
Low volatility = Flat markets
One of the worst market conditions that a day trader prefers not to trade in is when the markets are flat. By flat, we don’t mean prices moving in a sideways range, but rather, the session ranges are very limited. This leads to prices trading at or close to the same price level for prolonged periods of time.
In the forex markets, you can experience flat markets during the closing of the New York trading session and in the early hours of the Asian trading session. The first few hours of the Sydney trading session can see markets trading almost flat.
This is because Sydney is a small market compared to that of Tokyo. There is also not much happening during this time. The only exception to the case is during days when there are news events from the Reserve Bank of New Zealand for example.
During this time, despite the effect of the news release, the low market conditions can lead to wider spreads and almost flat markets which can be disastrous to your trading.
Most of the action happens during the European and U.S. trading sessions
There is no doubt that most of the market events happen during the European and the U.S. trading sessions. During these periods, you can expect to see major news releases that cover the whole of the Eurozone and also other regions such as the UK, Sweden, Norway, Switzerland, South Africa, to name a few.
The U.S. trading session is also very active with the U.S. markets being the most influential. Therefore, the economic news releases you see during these periods can have widespread effects across all markets.
During the New York trading session, you can also see news releases from other markets such as Canada and Mexico which come under the same forex trading session.
When there are news releases and the market volumes are high, you can expect to see a lot of volatility. This can lead to good trading opportunities, especially for day traders. The intraday volatility allows you to capture the market movements and make profits during such times.
It is important to note that trading during periods of low volumes or liquidity brings inherent risks. For example, it is common for currencies to make wild or erratic swings during such periods. The chart below gives one such example, when quite a few currency pairs posted sharp declines during the early Asian trading session.
The chart above gives a very recent example when the AUDUSD currency pair posted strong declines within a matter of a few minutes for apparently no reason except the low liquidity conditions prevailing during the close of the NY trading session and the early Asian market open.
Best times to trade forex – Conclusion
In conclusion, we now know what are the three main forex trading sessions, and how they can influence their respective currencies. You also learned about the reasons why traders should pay attention to the forex trading sessions and the reasons behind it.
However, it is important to note that the U.S. dollar is the exception. Given the fact that the USD is the world’s reserve currency, regardless of which forex trading session you look at, the liquidity in the USD is always high.
This liquidity of course increases even more during the NY trading session.
The EURUSD is most the liquid currency pairs in the world that you can trade. Therefore, the EURUSD is probably the safest currency pair that you can trade regardless of the forex trading session. However, you can still experience some wider spreads when you trade during off market hours.
