Many first-time forex traders rush into the market. They monitor various economic calendars and trade aggressively on every data release, seeing the 24-hour, five-day-a-week foreign exchange market as a convenient way to trade all day. This strategy not only quickly depletes a trader’s reserves but can also burn out even the most tenacious trader.
Unlike Wall Street, which operates on regular business hours, the forex market operates on the regular business hours of four different parts of the world and their respective time zones, which means trading occurs at all hours of the day and night.
So what’s the alternative to staying up all night long? If traders can gain an understanding of the market hours and set appropriate goals, they will have a much stronger chance of realizing profits within a workable schedule.
The Forex Markets Hours of Operation
First, here is a brief overview of the four markets (hours in Eastern Standard Time, or EST):
New York (open 8 a.m. to 5 p.m.) is the second-largest forex platform in the world, watched heavily by foreign investors because the U.S. dollar is involved in 90% of all trades, according to “Day Trading the Currency Markets” (2006) by Kathy Lien.1 Movement in the New York Stock Exchange (NYSE) can have an immediate and powerful effect on the dollar. When companies merge and acquisitions are finalized, the dollar can gain or lose value instantly.
Tokyo, Japan (open 7 p.m. to 4 a.m.) is the first Asian trading center to open, taking in the largest bulk of Asian trading, just ahead of Hong Kong and Singapore. The currency pairs that typically have a fair amount of action are USD/JPY (or U.S. dollar vs. Japanese yen), GBP/USD (British pound vs. U.S. Dollar), and GBP/JPY (British pound vs. Japanese yen). The USD/JPY is an especially good pair to watch when the Tokyo market is the only one open because of the heavy influence the Bank of Japan (Japan’s central bank) has over the market.
Sydney, Australia (open 5 p.m. to 2 a.m.) is where the trading day officially begins.
While it is the smallest of the mega-markets, it sees a lot of initial action when the markets reopen on Sunday afternoon because individual traders and financial institutions are trying to regroup after the long pause since Friday afternoon.
London, Great Britain (open 3 a.m. to noon): The United Kingdom (U.K.) dominates the currency markets worldwide, and London is its main component. London, the central trading capital of the world, accounts for roughly 43% of global trading, according to a report by BIS. The city also has a big impact on currency fluctuations because Britain’s central bank, the Bank of England, which sets interest rates and controls the monetary policy of the GBP, has its headquarters in London. Forex trends often also originate in London, which is a great thing for technical traders to keep in mind. Technical trading involves analyzing opportunities using statistical trends, momentum, and price movement.
The Best Hours for Forex Trading
Currency trading is distinct due to its operating hours. The week begins on Sunday at 5 p.m. EST and ends on Friday at 5 p.m.
Not all hours of the day are suitable for trading. The best time to trade is when the market is most active. When more than one of the four markets is open simultaneously, the trading environment is heightened, resulting in greater volatility in currency pairs.
When only one market is open, currency pairs tend to lock in a tight pip spread of about 30 pips. When two markets open at the same time, movement can easily exceed 70 pips, especially when major news is released.
Why is the Forex Market’s Trading Times Important?
Although the forex market is open 24 hours a day, the market is more active during different sessions or when there is a crossover between two sessions in different geographic locations, which means spreads are tighter. However, this increased activity is typically limited to currencies found in both locations of a crossover – for example, GBP/USD sees higher trading volume when both the European and US sessions are open between 12 pm and 4 pm.
The beginning of each trading session is when the big institutions such as investment banks are active, and this is often when relevant economic data for each session is published. For example, the UK’s major data releases come out at 8.30 am (UK time), while the US tends to publish its numbers from 11.30 am until about 2.30 pm (UK time).
These announcements can generate significant volatility depending on the market reaction, so every forex trader needs to know when they are published.
How do Trading Hours Affect Individual Forex Pairs?
The overlap will have a greater impact on some forex pairs than others. For example, EUR/USD and GBP/USD will see increased activity as New York settles in while London remains fully operational.
A forex pair typically has more liquidity when at least one of its markets is open; for example, USD/JPY will be busiest during the Asian or US sessions but less during the London or European sessions. EUR/JPY will be more active at the start of the London session, while EUR/USD will be less active during the Asian session, and so on.
Whichever pair you trade, whether one of the largest and busiest or one of the more ‘exotic’ ones, it is critical first to understand what data is being published today and second, which sessions are likely to be the most volatile. Traders can trade during volatile or quiet periods, with both approaches having advantages and disadvantages.
As with many other aspects of trading, there is no “perfect” or “best” time to trade forex. However, there will be times when the market is better than others or when a particular trading style or currency pair is better suited.
What to Bear in Mind Before Trading During Different Forex Market Hours
Before trading during different forex market hours, you should keep a few things in mind. For starters, keep in mind that liquidity will be high or low depending on when you trade and whether there is any overlap in that session.
The geographic areas included in the overlap have an impact on liquidity as well. The London-New York overlap, for example, is frequently more liquid than the London-Tokyo overlap. The same is true for volatility levels, with the FX market frequently experiencing higher volatility during the London-New York overlap.
Some traders, such as those who use a scalping trading strategy, prefer high volatility, while others do not. As a result, it is important to have an effective risk management plan while trading during different forex market hours.
Overlaps in Forex Trading Times
The best time to trade is during overlaps in trading times between open markets. Overlaps equal higher price ranges, resulting in greater opportunities. Here is a closer look at the three overlaps that happen each day:
- U.S./London (8 a.m. to noon): The heaviest overlap occurs in the U.S./London markets. More than 70% of all trades happen when these markets overlap because the U.S. dollar and the euro (EUR) are the two most popular currencies to trade, according to Lien. This is the most optimal time to trade since volatility (or price activity) is high.
- Sydney/Tokyo (2 a.m. to 4 a.m.): This period is not as volatile as the U.S./London overlap, but it still offers a chance to trade in a period of higher pip fluctuation. EUR/JPY is the ideal currency pair to aim for, as these are the two main currencies influenced.
- London/Tokyo (3 a.m. to 4 a.m.): This overlap sees the least amount of action of the three because of the time (most U.S.-based traders won’t be awake at this time), and the one-hour overlap gives little opportunity to watch large pip changes occur.
Impact of News Releases on Forex Markets
While understanding the markets and their overlaps can help a trader plan his or her trading schedule, one factor should not be overlooked: the news release.
A major news release can potentially boost a normally slow trading period. When a major announcement about economic data is made, especially if it contradicts the predicted forecast, currency can lose or gain value in seconds.
Even though dozens of economic releases occur every weekday in all time zones and affect all currencies, a trader does not need to be aware of them all. It is critical to distinguish between news releases that must be watched and those that should be monitored.
In general, the greater a country’s economic growth, the more positive the economy is viewed by international investors. Investment capital tends to flow to countries that are thought to have good growth prospects and, as a result, good investment opportunities, causing the country’s currency to strengthen.
Furthermore, a country with higher interest rates on its government bonds tends to attract investment capital as foreign investors seek high-yielding opportunities. On the other hand, stable economic growth is inextricably linked to attractive yields or interest rates.
Significant news events include the following:
- Interest rate decisions by central banks since higher interest rates tend to attract more global investment and capital flows, strengthening the currency.
- CPI data, which measures inflation and can impact central bank policy
- Trade deficits or more imports versus exports translate to more cross-border capital flows impacting exchange rates.
- Consumer consumption–a significant driver for economic growth in the U.S. and globally
- Central bank meetings since any remarks are watched closely for indications of future interest rate moves.
- Consumer confidence, which measures how the average consumer feels about the economy and impacts consumer spending
- GDP data, or Gross Domestic Product, is a measure of all goods and services produced in a country
- Unemployment rates, which measure the unemployed workforce since lower unemployment tends to translate to better growth and a stronger currency and vice versa
- Retail trade measures how much is being spent by consumers and drives economic growth
Why Do Forex Markets Trade Around the Clock But Not Stock Markets?
In some ways, forex markets are “open 24/7” because of different exchanges around the world trade in the same currency pairs. A stock exchange typically lists and trades in shares of a single country, so even when other stock exchanges are open internationally, they primarily trade in local securities rather than the same stocks. While foreign stocks are available in the United States as ADRs, the ADR shares will remain closed when the actual foreign shares are open, and vice versa.
Why Is Forex Liquidity Important?
The ease with which securities can be bought or sold at a fair price is called liquidity. When there is a lot of liquidity, the bid/ask spread narrows, and you can trade more without moving the market. In an illiquid market, on the other hand, the spread between the bid and ask may be very wide but not very deep. In general, liquid currency pairs are active and have a high trading volume.
Which Are the Most Liquid Currencies?
The most traded currencies in the world include the U.S. Dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), and Swiss Franc (CHF). The four major pairs are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
When creating a trading schedule, taking advantage of market overlaps and keeping a close eye on news releases are critical. Traders looking to increase profits should trade during more volatile periods while keeping an eye on the release of new economic data. This balance enables part-time and full-time traders to create a schedule that gives them peace of mind, knowing that opportunities will not be lost if they take their eyes off the markets or need to sleep for a few hours.