When it comes to forex trading, it can be tempting to hit the market running with an unsustainable amount of energy. After all, the overlapping trading sessions mean it’s technically possible to trade all day long, five days a week. The problem is, this can lead to poor decision making and a trading burnout. Moreover, not every second of the day will be profitable. So, what is the best time to trade forex? And when should you take a break from reading charts and analysing trading data? Let’s take a closer look.
The four main trading sessions explained
The four major forex exchanges are located in Sydney, Tokyo, London and New York. They run on normal business hours within the respective time zones which means trading lasts all day and night, Monday to Friday. To illustrate this point, here’s a rundown of the opening and closing times of each trading session. All times are noted in East Africa Time (EAT).
Sydney: 1am – 10am
Tokyo: 3am – 12noon
London: 11am – 8pm
New York: 4pm – 1am
As you can see, the markets are open and easily accessible to forex traders throughout the week. And, aside from the Tokyo session which opens early, are spaced nicely throughout the day. Knowing when to make your moves can therefore be difficult, particularly if you’re new to the trading world or have little self-discipline. But with increased understanding of the markets, you can create a time-based trading plan that works for you.
Trading when the market is most active
Volatility is one of those words that traders both love and hate. Volatile markets can symbolise huge losses, but it’s also a chance to make gains. That’s why one of the best times to trade forex is when the markets are most active. Why? Because when more than one trading session is open at the same time, volatility increases resulting in greater opportunities. With a surge in active participants, currencies can move very quickly. Indeed, movements north of 70 pips are common. There’s a real buzz in the air during these times, with many traders navigating the markets with the upmost concentration.
So, to use these overlaps periods to your advantage, you need to know when they occur. Again, all times notes are in EAT.
- London and New York
The London and New York sessions overlap from 4-8pm EAT, Monday to Friday, making this a particularly hot zone for traders. This is 1-5pm GMT which covers the lunch period of London city workers, with London being a significant trading hub. These hours are powerful because volume and volatility reach their peak. This means a large number of lots are sold and/or bought for a currency pair and prices can move at speed. Experienced traders know that when more than one of the four markets are open simultaneously, they take their risks with volatility and expect significant currency pair fluctuation. It’s fair to say that the London/New York overlap is the most exciting for many entering the forex markets.
- Sydney and Tokyo
The Sydney and Tokyo markets overlap for two hours between 10am-12pm EAT. This gives traders the chance to experience higher pip fluctuations. Again, the higher volatility, the more money you can potentially make should you enter and exit trades at the right times. This overlap is not quite as exciting as the London and New York clash as volumes tend to be slightly lower, but by trading currencies that are influenced such as EUR/JPY, you can take advantage of any rapid currency movements.
- London and Tokyo
The London and Tokyo markets are open for from 11am – 12noon, sharing an hour of trading activity. As traders are most likely to be sleeping during this period, it’s not typically busy, but increase volume can and does happen if you’re willing to watch the markets closely. That said, the one-hour overlap does not give much opportunity for large pip changes to occur, so it might be worth taking a break. Or, cluing up on the markets by reading news releases or practicing your strategy on a demo account.
Top tip: During quieter market periods, think about your mental health. Many traders succumb to health and fitness problems as well as psychological issues as they fail to take a proper rest when the markets are quiet. Plan social activities so that when you come back to your screen, you’re ready to knuckle down and crack on.
News releases can increase volatility
While the overlap of trading sessions can increase trading activity and therefore volatility, other factors can also impact the volatility of the markets. News releases, for instance, can cause currency pairs to surge or drop depending on what’s being announced. Economic data is often the catalyst for short-term movements giving a normally slow trading period a boost. This, in turn, creates periodic volatility for traders to factor into their trading movements and potentially benefit from. Volatility is particularly rife when news goes against the expected forecast. That’s why keeping abreast of all the latest updates is a must.
Examples of significant news to watch include: Interest rate decisions, CPI data, trade deficits, consumer consumption, central bank meetings, consumer confidence, GDP data, unemployment rates, retail trade, inflation and more. It’s important to read market overviews and analysis before trading in order to tweak your strategy. Remember, there’s always an element of risk and so using a demo account before dipping into your own funds is wise as this will help you get into the swing of navigating forex volatility.
Trading forex takes time and consideration. Understanding the markets is a must with overlap periods increasing volatility. This can lead to a boost in gains and losses, so approach with caution while monitoring news releases. And remember what time zone you’re in. Change your mindset if you travel from EAT to GMT and so on.