By Max Munroe on November 08th, 2013

Let’s get right back to basics here. We get asked about this stuff a lot and it’s always worth reminding ourselves how and when the forex markets operate.

So I want to talk about the main forex sessions.

During the week, the forex market is open 24 hours per day. That’s one of the big plus points. You can trade this stuff pretty much all the time!

But what’s crucial is that not all times of day are equal.

Understanding why that is is an important lesson for any trader. Get to grips with this and you can adapt your trading style to suit the market conditions.

Why liquidity matters

The first thing you need to know is that liquidity is a key concern when comparing various times of day. You can think of liquidity as the ability to fill a trade without significant shifts in price.

Highly liquid pairs like EUR/USD (euro v US dollar) can soak up very large orders without blinking.

But more exotic pairs will likely slip more noticeably when a very large order is placed. That’s because there are less orders in the market. So the large order consumes all of the nearby orders at various prices before eventually being filled.

And this effect is exaggerated during low liquidity times.

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Now in reality, the forex market is absolutely huge. That means that the opening and closing of positions won’t be a liquidity concern for all but the largest of traders.

But what will be a concern will be how the behaviour of the market changes during periods of varying liquidity. And that’s what I want to explore today.

For high liquidity, we need a large number of orders in the market. So it fits that the highest liquidity periods of the day are when the largest number of traders are active in the market.

Take a look at this timeline of international trading zones and we’ll go through them below:

Fig. 1) Measured liquidity relative to a 30-day average for the main trading sessions. (source: www.forexfactory.com )

Sydney (10pm 7am GMT)

This is where the trading day and week starts. But it’s perhaps the quietest of the sessions, save for an occasional pick-up in volatility at the weekly open as traders react to the weekend’s news.

It’s also worth remembering that the interbank market can be active several hours before the retail FX market. So there is the possibility of large gaps in price when the retail FX market opens.

Professional traders use New York close charting too. That means that daily candles will begin at the start of this session and close at the end of the New York session which, depending on the price action, can also be a source of volatility at the daily open.

On the whole though, liquidity is frequently the lowest until Asia opens. Spreads will be wide and trading is often very slow. The previous day’s moves will typically be consolidating by now, unless there is a major market-moving piece of news.

When a big piece of news lands during this session, the thin conditions cause excessive volatility and exaggerate the any moves.

Tokyo (12am to 9am GMT)

Liquidity increases at the beginning of the Tokyo session as can be seen in Figure 1. This activity typically reduces as the session progresses, with America and Europe fast asleep. The Yen and Australian pairs are often the most active pairs during this session, which is reflective of the Tokyo and Sydney stock exchanges being open.

The large moves observed in the London and New York sessions, though, are less common in the Asian session, which makes range-bound and breakout trading more suitable.

London (8am to 5pm GMT)

London dominates the FX market place, so the larger moves are often started during this session. The London open at 8am is often a turning point for the day’s trading activities and large trending moves can frequently be observed during this session.

UK and European data is typically early in the London session so when Asia closes at 10am, there can be a slight lull until New York opens, unless there is a strong trend to keep things ticking along.

New York (1pm to 10pm GMT)

New York is where the trading day and therefore trading week ends. US data is typically early in the session too, so the crossover from London to New York is one of the most important times of day for traders.

Liquidity is at its highest, spreads typically at their lowest and the risk of an exhausted trend reversing is high.

As London closes, though, we go into what is referred to as the New York afternoon. Here trading activity dies down compared to earlier, but there are still a lot of traders in America sat at their desks.

As such, if an important piece of news hits during this time, it can display remarkable volatility. This makes news and breakout trading favourable during this quiet period.

We’ll explore this in more detail in future issues and look at strategies that suit these different levels of activity. But I hope this helps remind you about the different sessions that make up the forex day. Any thoughts, leave your comments below

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