After the fall of the Bretton Woods System in 1971, the world’s major currencies soon followed a floating exchange rate regime. Simply put, this meant that a currency’s value would be determined based on its supply and demand compared with another currency. With the exchange rate being such an important factor weighing on a country’s economic growth, currencies are always highly demanded. From central banks and governments to retail traders and businesses, all constantly make and meet orders. This means that the Forex market has a lot of liquidity and is open 24 hours, providing a very flexible scenario for traders.
These factors are some of the main advantages of the Forex market over other financial markets such as the stock or bond markets. Nevertheless, this also has its drawbacks. Just because the market is always open on weekdays that does not mean that you get the same market conditions every time. Depending on the time and session you’re in, ranges, volumes and the pairs being predominantly traded vary.
In this article, we will discuss when one should trade by covering the main forex hours and sessions.
Major Forex Sessions
Firstly, what exactly are trading sessions? A trading session is a period of time during a business day in financial markets in which buyers and sellers set the current market price. In this case the pair’s exchange rate. In the Forex market, those considered to be the most important ones are the major financial centers in North America, Europe, and Asia. Namely Tokyo, London, and New York.
In the following table we can observe at what time they open and close according to the Greenwich Mean Time (GMT):
Note: It is important to point out that the Forex market opens on Sundays at 21.00 (GMT+0) and closes on Fridays at 21.00 (GMT+0) in the Winter time. Adjusting to your time zone and taking into consideration the daylight saving time, will tell you at what hours the market opens and closes for you. For example, if you live in Portugal (GMT+1), the market schedule will be from Sundays to Fridays at 22:00 pm.
Trading in the Asia-Pacific region accounts for approximately a quarter of all transactions made in Forex. When being referred to, the Asian Session is often associated with the Tokyo session as it is one of the largest trading centers in the world. This should come as no surprise as the Japanese yen is the third most traded currency in the world. However not only Japan trades in this session. Russia, Malaysia and South Korea are among others participating. Moreover, with Asia and the Pacific region’s rapid development over the years, financial centers such as Singapore, Hong Kong, and Sydney gained importance.
One characteristic of this session is that prices are usually less volatile and average hourly moves are smaller. This leads to supports and resistances being more likely to hold, allowing to trade ranges. Although less likely, news events can serve to trade breakouts as well.
Currency pairs that involve the Japanese Yen (JPY) , Australian dollar (AUD) or the New Zealand dollar (NZD) are more likely to show stronger movements. Being the first session of the trading day, it sets the tone for the following market sessions to come.
Before the Asian trading hours come to an end, the European session opens. A number of big trading centers operate during this time. However, London is undeniably the most important one. Mostly due to its location and the fact that it accounts for approximately 30% of all transactions being made in Forex. As a result, it is considered to be the Forex capital of the world and the epicenter of this session.
In the beginning, the previously stubborn supports/resistances are more likely to be broken due to volatility. This Tokyo/London overlap is the second most active period of the trading day, only outclassed in the afternoon. More specifically when London and New York are open at the same time.
During this session, the subjacent higher liquidity provides a better setup to trade trends. In between, as lunchtime approaches, there is a significant loss in activity as traders fuel up for the busiest overlap to come. At the end of the session, with so much activity, trends may reverse as traders seek to lock their earnings (excess supply/demand).
North American Session
The US Dollar is by far the most traded currency in the world. It is present in 80% of all trades being made in the market, either directly or as a vehicle. Like all currencies, fundamental economic variables support its value. In this case, those variables come from the world’s largest economy, the United States, hence its value.
As previously mentioned, the most active hours occur when major sessions overlap. Being the London/New York overlap the most active one, this allows for transaction costs to be at their lowest values. The bid-ask spread is thus minimized and placing orders becomes much cheaper. With so much liquidity nearly any pair can be traded, but major pairs like EUR/USD, USD/CHF and GBP/USD offer the smallest spreads.
After the overlap with the European session, activity usually dies down. At the end of the New York session, most traders start closing their positions. Those that trade the North American/Asian overlap still find some liquidy. However not as pronounced, and falling once more into the range trading associated with the Tokyo session. The market activity naturally reaches its lowest point on Friday afternoon.
To Sum up
Some might argue that the Asian session is the best as low volatility enables you to manage your trades more functionally . Others might say that most liquid hours will provide more opportunities for good trades. So overlapping sessions are the best answer. But it all comes down to the same thing. It depends on what works better for you.
When deciding when to trade you should take several factors into consideration:
- Volatility – Evaluate if greater pip ranges suit your trading and risk profile or not;
- Your schedule – There is always a new opportunity for a good trade. There is no need to overdo it. Being tired or not having the right mindset won’t help your results at all;
- Other time frames – Don’t stick to just one time frame. Conducting multi-timeframe analysis will enable you to better identify trends and signals;
- Economics Drivers – Central banks’ reaction to economic growth, commodity trading, etc. Being aware of them can greatly aid your market analysis and ultimately provide you with better trades;
Hope you found this article useful. Be sure to comment and share this article with a friend!