The forex market operates differently than other financial markets, as it remains open 24 hours a day, making it an ideal place for traders who prefer flexible timings. However, choosing the best time for trading is important to find suitable opportunities in the constantly fluctuating currency market. For this, you will have to learn about the market hours and trading sessions. This beginner’s guide will educate you about the same, helping you to decide the best time for forex trading based on your time zone and preferred currency pairs.
Introduction to Forex Trading - Market Hours and Trading Sessions
As you may already know, the forex market is open for trading 24 hours a day and 5 days a week without any break. The market is closed on the weekends and some special holidays. There are 4 major trading sessions based on the time when the major financial centres around the world are active. The major trading sessions are named the New York, London, Sydney, and Tokyo sessions. This distinct feature of the forex market is a major attraction for traders from different parts of the world, as they can always engage in trading without any time constraints.
The decentralised structure of the forex market, making it easily accessible across the globe, and the high liquidity of currency pairs also contribute to the popularity of currency trading. Do not forget about the high leverage offered by forex brokers, which can amplify your potential profits if used correctly. One tool you need to use while availing leverage is a margin calculator, which tells you the accurate margin requirement to keep your trade positions open.
Returning to the market hours and trading sessions, even though the market is tradable throughout the day, the trading volume depends on market activity; hence, the liquidity of different currency pairs keeps changing. The liquidity of specific currency pairs is high during major trading sessions and session overlaps, which is why scalpers and day traders choose this time to minimise trading costs and execute trades with ease. Basically, one has to choose their trading session considering the pairs they want to trade with.
Trading during peak market hours is beneficial as you get the advantage of high liquidity, and there will be fewer chances of slippage or price re-quotes happening. The volatility of currency pairs also varies during different sessions. The extent to which the price can move within a time period is based on the volatility. The price movements are measured in pips and it also determines your profitability, and you can use a pip calculator to understand this better. Using a pip calculator, you can quickly get the accurate value of pips in the currency you are trading in.
The Art of Specialization
In order to find the perfect trading session that aligns with your trading goals and strategy, you need to learn about the distinct features of different trading sessions. The session timings will be stated in UTC (Coordinated universal time) to make it easily understandable.
- Tokyo Session - 12 AM to 9 AM UTC
- London Session - 7 AM to 4 PM
- New York session - 1 PM to 10 PM
- Sydney Session - 9 PM to 6 PM
Now, let’s look at each session in detail.
- Tokyo Session
The Tokyo Session is also known as the Asian session, and it is considered a good time to trade pairs, including the Japanese Yen currency. Asian traders are active during this session, and the price fluctuations tend to be predictable. The market movements are influenced by economic indicators that are specific to the Asian region. You will see the Bank of Japan’s monetary policy and the economic situation of Japan impacting the market during this session.
The volatility is low but good enough to find the right trading opportunities. The risk is low as it is easier to anticipate the exchange rate fluctuations based on market analysis. This is different from other sessions characterised by intense and sudden volatility during news and economic data releases, making it harder to predict potential price movements. The Tokyo session is ideal for beginners to limit their exposure to risk.
Basically, the Asian session gives you more momentum as the prices tend to be more stable unless and until there is a global or regional issue messing with the market situation. The Tokyo session is especially suitable for trading pairs like USD/JPY, AUD/JPY, GBP/JPY and EUR/JPY. The Tokyo session overlaps with the Sydney session, making it a good time to trade for high liquidity.
- London Session
The London session is also known as the European session, as traders from Europe are active during this session. The forex market tends to be the busiest during this time, and 37% of total trading volume comes from the London session. During this session, the liquidity is highest, but there is also high volatility, which attracts a lot of traders due to the high number of trading opportunities it creates. But this also increases the risk as the market can move in any direction.
The London session is more suitable for seasoned traders who can deal with volatility and sudden price fluctuations without getting intimidated by the fast-moving prices. Beginners can get overwhelmed by the high volatility during this session, but it is still a good time to trade to optimise your profit potential. You can come up with a solid risk management plan and use tools like profit calculators for planning the entry and exit points based on the potential outcome of trades.
The London session overlaps with the New York session between 8:00 AM and 12:00 PM ET, one of the best times to trade the major pair EUR/USD. The spreads tend to be the lowest due to the high trading volume and you get a lot of trading opportunities. Pairs like GBP/USD, GBP/JPY, EUR/JPY, and USD/JPY are also very tradable during the European session.
- New York Session
The New York Session also experiences high volatility, and there is also high trading volume, which makes it the second most liquid session after the London session. The overlap of these two sessions is considered to be the busiest market hours as traders from the two largest financial centres are present in the market. The New York session is also referred to as the North American session, and it is an ideal time to trade major pairs like EUR/USD, USD/JPY, USD/CHF and GBP/USD.
The New York session is very similar to the London session as there is both high profit potential and a higher risk of loss as a result of the high volatility. The market keeps fluctuating and is heavily impacted by economic events and key economic data releases, especially those related to the United States. During this session, you will see the impact of Federal Reserve policy and decisions.
Those who are not well-versed in the market fundamentals may get lost during this session, and beginners may not be able to deal with the extreme volatility and frequent price movements. However, those with experience and knowledge can thrive during this session and make profits from favourable price fluctuations with the help of a sound strategy and risk management plan that works in volatile markets.
- Sydney Session
The Sydney session is also known as the Pacific session, and it is the best time to trade pairs, including the Australian Dollar. The volatility is low during this session, and there is enough liquidity. However, the Australian market is smaller than the US and European markets, and trading volume tends to be lower. The Sydney session is the best time to trade the popular major pair, AUD/USD.
But like I said earlier, the Tokyo and Sydney sessions overlap, which is a good time to trade for traders from both regions. However, the volatility can go high when there are news and economic data releases that must be considered while trading this session.
The Risks of Overtrading
Since the forex market is open 24 hours a day, traders are more prone to over-trading as there is no fixed schedule. Over-trading needs to be avoided at all costs as it can lead to huge losses in a short span of time. Hence, you should not try to trade during every session. The best approach here is choosing just one session and focusing on one or two major pairs in the initial phase.
In The End
Understanding the market hours and trading sessions is just as essential as learning the basic trading concepts. You need to choose the best time to trade to get the best possible results at the end of the trading process. You need to consider the liquidity, volatility, and tradable pairs of each session along with your own schedule to decide the ideal time for trading based on your strategy and chosen currency pairs.