Firstly, we will review the daily rhythm of the Forex market, the best times to trade the Forex market and also periods to avoid.
One of the most important aspects of trading the Forex market is to understand what drives price movement. We are often told that the market operates on a 24 hour basis 7 days a week – this is true but it does not mean that that you can apply any technique at any time and expect the same or even good results.
Contrary to popular belief the Forex Market is still driven by human behaviour. Volumes increase when the participants in the Forex market are physically at “the Office” working and volumes and activity dies down when those participants go home and sleep.
Many Forex traders focus so much on technical analysis that they ignore market behaviour completely. The Forex traders who are successful are masters at understanding market behaviour and then merely use appropriate technical analysis to enter the deal.
A fact to consider is that there is no official Forex market as there is a Stock, share or Bond market. Activities in the Forex market occur as a result of activities in all the other financial markets. So we need to study the times when these financial institutions open and close. A study of the trading volumes going through the Forex Market show how important the opening and closing of financial markets are to the Forex market.
Market openings and closing can often impact and change the direction of trading. You, therefore, have to be aware of time of day factors which can impact forex trading. Most of the day’s highs and lows come from the Asian open, European open and close, and the US open and close.
The period between the US market close and the Tokyo market has particularly low volumes. Although trends sometimes can occur in the period, poor candle stick formations are common during this period due to the extremely low volumes.
A further study of the average hourly ranges of currencies crosses will confirm the importance of the market openings and closings by the increased volatility created at those times.
1 The Open of the Tokyo market (9:00 am to 1:00 pm Tokyo time)
The Asian market has fewer announcements than the other markets and the announcements appear to have fewer whipsaws. Australia, Hong Kong and Singapore (1 hour later) are other exchanges impacting this market. The Asian Based currencies are best traded in this market (AUDUSD, USDJPY) along with the EURUSD. 26% of the daily highs or lows occur in this market
2 The Open of the European market (7:00 am to 9:00am London time)
The period covering the afternoon Asian and early European session is a low volume period. Volumes start increasing at about 7:00 am London time and this is often the best opportunity to catch some short term trends. Frankfurt is an important exchange that opens in this market. This period often produces the daily highs or lows with 8:00 am London being an important time. 8:00 am often produces the high or the low for the rest of the day. This market behaviour emphasises the importance of time of day trading.
3 The Opening of the London Financial markets (9:00am to 11:00am London time)
The London Financial market is the highest volume Forex market. The period around its open has the potential to produce the best trends. There are also more economic announcements impacting the EURUSD and the GBPUSD during this period. It is the best period to trade, where a scalping transaction can often get you into a +100 trend.
4 The Opening of the US Financial Markets (8:30am to 11:00 am New York)
The Opening of the US market can be very volatile due to the high concentration of announcements in this session (especially on Thursdays and Fridays). Chicago opens 1 hour after New York. The reactions to announcements are more severe with dramatic breakouts and whipsaws happening regularly. The US open happens when the European markets are still open and therefore you have a 3 hour overlap in volumes making it appear as if the US market is bigger than the UK one. In fact it has lower volumes. The USDCAD has its biggest trading volume in this market.
5 The close of the London and US markets (+/- 5:00 pm London time and +/- 5:00 pm New York)
The close of these markets can create trends or trend corrections until the Asian markets open. This period has fewer announcements and has fewer fear and greed type of moves. This is a highly tradable period with some good repeating patterns.
6 Economic Announcement times
Economic announcements result in new financial information about an economy being released. The disclosures often happen at a precise time of day and can cause trends when the news is not in line with what has been expected. Announcements are generally regarded as a high risk time to trade as they could result in higher velocity price moves and whipsaws.
The best way to trade these announcements is not to trade them. If you are in a deal you need to exit the deal or move your stop to protect your trade from disaster. Brokers tend to increase their spreads prior to a big announcement to discourage trading.