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Choosing the best times of day to trade Forex

Choosing the best times of day to trade Forex

One of the reasons the Forex market attracts so many traders is the fact that it's open for trading 24 hours a day. In contrast to the stock market, Forex operates in regular business hours of the three business centers across different time zones. In fact, it is hardly possible to single out the best time to trade Forex because it would be different for every trader, depending on his or her personal choices, goals, and strategies. But the good news is that traders are free to trade as and when they want to, according to their individual preferences.

This article will delve more into how different times of day in various parts of the world affect
different currency pairs – and your trading. Two major fundamental forces that have influence over the market – supply and demand – will be analyzed in order to outline the best times to trade Forex for you.

Liquidity of Forex market

In general, liquidity is not that important when selecting the best time of day to trade Forex, but
it should be brought up here as the background topic. Liquidity means being able to find a counterparty for any transaction, and although it might be a problem in some of the financial markets, this is not true for Forex.

Most trades are being conducted with the help of a market-making broker. Brokers are usually
available and ready to fill orders for traders. The only time when issues may arise is when brokers themselves are facing problem with order filling on the Interbank, for a gap is a gap for everyone. For instance, this was the case on 15 January 2015 in the time of the CHF move, when the Swiss National Bank lifted the euro peg.

This being said, price gaps are really rare in Forex. It might take a beginner trader several months of trading before he or she witnesses a price gap – Forex is a real liquidity miracle in this context.

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Volatility in Forex

Volatility indicates the strength of price fluctuations at a certain time of the day. It differs to
large extend from pair to pair and at each time of the day.

As long as most of the trading strategies do not perform well at times of increased volatility, every trader should make sure he or she understands the concept. As proven by many market tests, it's a good idea to set your trading schedule in agreement with volatility that is required for your strategy. This might affect major losses and profits even when all other things are the same.

For instance, let's take an oscillator-based trading strategy. It is performing the best when applied at ranging markets and used to chase the bounce offs beyond key levels. Such strategy will not gain much at high-volatility level breakouts. So whenever you are creating or analyzing a strategy, think of the volatility level it will need for better performance because generally, volatile periods are not the best times of day to trade Forex.

Why is this happening?

Price movements and volatility variations' dependence on instruments and days are explained by supply and demand. Any market, Forex or stock, is moved by the quantity of unfilled orders. The higher the volume of those unfilled orders and the bigger the number of them, the more volatile the market will be.

It is interesting to know who makes the market move. Mostly, it's institutions that place the largest orders in the biggest amounts and within set time frames. They are used to operating according to the working schedules of the world's trading capitals. The case is different with private traders, who can invest whenever they want to. Due to the institutions' trading habits, the 24-hour Forex trading day is divided into three international trading sessions –Asian/Pacific,
North-American, and London/European.

Trading sessions in Forex

The world's trading day starts officially in Australia, when the institutions of Sydney and New Zealand open at around 9 a.m. GMT+10. They mark the opening of the Asian-Pacific trading session. Tokyo joins in two hours with one of the largest volumes of Asian currency trading, followed by Singapore and Hong Kong trading markets.

Thus, currency markets open for the week on Sunday nights with the Asian-Pacific sessions. This is the time when institutions as well as individual traders try to stabilise if there were relevant events during the weekend. This is the only time in the week when gaps are the most likely to occur regularly. So if you need gaps for your trading purposes, you might want to take this fact into consideration; otherwise, trading over the weekend is not the best time to trade Forex.

The next to join the trading day session, at 7 a.m. GMT, are the London/European time zone markets that replace the Asian/Pacific session. German Frankfurt, which is the financial heart of Europe, begins one hour prior to London, but this is lag is rarely noticed. They are followed by the North-American trading session, which starts at 12 p.m. GMT with New York trades, followed by those in Los Angeles. Before the night falls in LA, the markets' activities will fade, marking the end of the trading day.

Of course, there is some overlaying between the markets as they gradually replace one another; this will be explained later.

How institutional operations influence trades

Usually, morning hours are the time when institutional traders are conducting the most of their activities – this is the best time of day for them to trade Forex. Also, the beginning of the day is the time when monetary policy makers send out their messages and news are released. This causes the rise in the level of volatility.

There is logic in the currency relevance. In the morning London time, it will be the Bank of England that announces financial news and British companies that hedge orders to secure their future purchases in pound sterling from abroad. Hence, it will be the British funds and banks trading on the market. The country's private traders are most active in the day time for this reason, but they will have little effect on the market due to the insignificant volume they produce and because they are not as currency-bound. The same logic is true for other countries and
currencies, so if you need volatility for your trading strategy, then the best times of day to trade Forex for you is when the bigger players make their moves.

Thus, the London session would be the most volatile time of day for the European currencies and pairs that include them, i.e. EUR, GBP, and CHF. Similarly, currencies of the countries from the Asia-Pacific will be traded most actively during the Asian-Pacific session. They include JPY, AUD, NZD, and also SGD and HKD, to a lesser extent. Finally, USD, CAD, and MXN have the highest volatility during the North-American session.

Volatility spikes might get distorted due to the abovementioned overlap in trading sessions, in
addition to the notion that currency pairs often include currencies from different regions. The heaviest of the overlaps is London/New York. This should come as no surprise, for EUR/USD is the most traded pair in Forex, while GBP/USD is the third most traded. Second big case is Tokyo/London – this is the time when US movers are comparatively inactive, allowing more trading with crosses like EUR/JPY and GBP/JPY. Lastly, with Tokyo being 16 hours ahead of
Los Angeles, this overlap has the last trading activities in the day.

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Elephant in the trading pit

Another important thing to remember is that most of the currency market volume is generated from the Forex spot market, the most traded by retail traders. The spot market is open 24/6, while the futures market is linked to physical exchange centers – the Chicago Mercantile Exchange and its few partners in the US and abroad (they are called introducing brokers). This is very important because it emphasizes the idea that all pairs can only be traded against the US dollar in the future market.

Learn your market

In order to measure average volatility for a given currency pair at a given time, traders use supporting software like Autochartist, offered by Admiral Markets. You need to conduct some research and make sure that your strategy does not suffer from volatility, but appreciates it. This is the rule for finding the best times to trade Forex. The Forex market is open 24 hours a day, but it does not mean you have to be watching it all the time. An alert and clear mind is what's needed to succeed in Forex. Make sure that the strategies you elaborated allow you trading accordingly, without giving up your actual routines.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.