It is often said that there is never a dull moment in forex and that the markets barely sleep. This is true considering that forex is traded across different timezones and different markets leaving little to no room for forex trading to calm down.
However, you might notice that some hours of the day see a lot more volatility than other parts of the day. Let’s take a look at how timezones and different markets play a role in not just currency pairs but also precious metals such as Gold and Silver as well as energies such as Natural Gas and Crude Oil. But first….
Why consider forex trading times?
There are many reasons why traders would carefully choose their trading times. From geographic point of view to the currency pairs being traded, let’s not forget volatility and liquidity and to a certain extent the type of forex broker you are trading with as well. While trading times might not matter much to someone trading with a Market Maker, scalpers who typically trade with ECN’s tend to prefer during large market participation as they can make quite some gains by profiting from the pips.
How Forex Market Trading Hours Work
In order to understand how the forex market trading hours work and to potentially figure out the best time to trade forex, we must first understand trading sessions and how they play a role in forex trading.
At the outset, forex trading can be classified into four main trading sessions mentioned below. We take into account these four major trading sessions as they form the largest part of forex trading or in other words the trading sessions reflect the currencies as well.
Typically, USD is the most traded currency, followed by the EUR, JPY, GBP and AUD. By understanding the trading sessions and their relative currencies, one can easily identify the currencies that will tend to fluctuate the most. For example, JPY would be the most volatile during the Tokyo trading session and so on.
- Sydney Session
- Tokyo Session
- London Session
- New York Session
Refer to the illustration below for a graphical representation of how the forex market trading hours work.
As you can see, there are three specific intervals when the trading sessions overlap. Namely,
- the Tokyo and London Session overlap between 7AM and 8AM
- the London and New York Session overlap between 12PM and 4PM
- the Sydney and Tokyo Session overlap between 11PM and 7AM
The trading times differ when DST or Day light savings time are switched off. During such winter periods, Sydney turns the clock ahead by an hour where as London and New York move the clock ahead by an hour.
Therefore, the forex trading times during DST or Winter season are as follows:
- Sydney Session Trades from 9PM – 6AM GMT
- London Session Trades from 8AM – 5PM GMT
- New York Session Trades from 1PM – 10PM GM
*Tokyo trading sessions remain the same
The overlap of trading sessions means that there is more trading activity that occurs. Currency volatility is usually high during such overlap periods especially the majors and their corresponding trading session (ex: EUR/USD, EUR/JPY etc).
Characteristics of the Trading Sessions
During each of the trading sessions, the economic data that is relased is not just limited to the particular country but surrounding countries that form a major trade partner. So for example the Tokyo session takes into account other Asian giants such as Singapore, China, Hongkong and so on.
During the trading sessions, the market participants are made up of export and import companies, central and international banks, large financial companies. Also some of the trading sessions tend to largely impact other trading sessions. For example, the Tokyo session usually sets the tone for the New York session as traders tend to set up their strategies and plans accordingly. Similarly any major market moves during the New York session is usually seen to be consolidated by the Tokyo session.
Trading during the London session offers high liquidity as it overlaps with other major European markets including the Swiss. During London sessions one can typically see lower spreads which is a contrast to the Tokyo session where liquidity is usually thin. A typical London session would see high volatility during the opening of the markets which slowly calms down towards lunch time and picks up post lunch which co-incides with the opening of the US markets. This is also the most preferred time for economic news to be released (which is why most of the US economic market data, comes out during mid day to later in the evening for traders based in Europe).
Liquidity, which is usually high during the start of the US markets cools down as the London session wraps up.
Liquidity, Volatility and the Trading Hours
Investors notice high liquidity when there are more market participants. As obvious, liquidity usually increases during times of market session overlaps. During these times the spreads can be close to minimal due to lower costs of transaction.
Traders should ideally choose what trading hours they want to trade based on the currency pairs they want to trade and if it matches during the business hours of the corresponding trading session. Also, the fact of which forex broker you trade with (Market Maker = Fixed Spreads v/s ECN = Variable Spreads) should be taken into consideration.
When it comes to trading precious metals such as Gold and Silver, the same two factors, liquidity and volatility needs to be considered, which is usually high during the London and New York session. When it comes to Crude Oil trading, it is obvious that the US is the largest importer of Crude Oil, so you can expect to see market activity for Crude Oil trading. The European markets or the London Session comes takes the second spot.
To conclude, the best time to trade the forex market is usually when there is an overlap of the trading sessions. Bear in mind that the Sydney and Tokyo sessions offer thin liquidity so prices are less volatile where as the open and close times of the European session along with the open time of the US session often carries higher liquidity. Trading during weekends is not a good choice and investors should pay attention to their trades when trading during economic news releases.