Understanding Forex Trading Sessions

The foreign currency market is unique since it operates 24/7. With the advent of 24/7 trading, investors can now place trades at any time of the day or night, regardless of their time zone. However, when it comes to foreign exchange trading, not every time of day is made equal.

There is always a market for the most liquid asset class there is, forex, however there are times when price activity is continuously volatile and times when it is quiet.

Furthermore, different currency pairs display varying activity during specific times of the trading day due to the overall demography of those market players who are online at the time.

This article will discuss the three main trading sessions, discuss the types of market activity that may be expected during each session, and demonstrate how this information can be incorporated into a trading strategy.

How the 24-hour Forex market works

Many institutional and individual traders benefit greatly from a 24-hour forex market since it ensures liquidity and allows them to trade at any time of the day or night. Although currency trading is possible around the clock, a single trader can only keep tabs on a position for so long.

Since most traders can’t monitor the market around the clock, they’ll miss opportunities occasionally, and may even see their positions eroded by a sudden spike in volatility that occurs when they’re not available to protect them.

Since market volatility can affect any trader’s profits or losses, it’s important for traders to recognise periods of high and low volatility and adjust their trading accordingly.

Market activity often peaks during the Asian, European, and North American sessions (also known as the Tokyo, London, and New York sessions, respectively). These terms are used interchangeably because all three cities are considered to be regional financial hubs.

Most banks and enterprises in the respective regions perform their daily transactions, and there is also a bigger concentration of speculators online, while these three super-economies are open for business.

The Asian Session

Whenever the foreign exchange (FX) market regains its footing at the start of the week, all eyes are naturally drawn to the Asian markets. Unofficially, this region is represented by the Tokyo capital markets between the hours of midnight and six in the morning (GMT).

Notable countries including China, Australia, New Zealand, and Russia are also present throughout this time. Because of the dispersed nature of these markets, the start and finish of the Asian session naturally extend over the typical Tokyo hours.

As a result of the time zone difference, the Asian market is typically considered to be open between the hours of 11 p.m. and 8 a.m. GMT. You can learn more about the Asia Session here.

The European Session

Just when the Asian trading hours are winding down, the European session begins its activity. Many of the world’s most important financial centres are concentrated in this FX time zone. To date, London has been tasked with setting the terms for the European session.

The existence of other capital markets (such as Germany and France) before the formal open in the U.K. additionally lengthens the trading period, while volatility persists until after the close, delaying the session’s completion. As such, the standard European workday begins at 7 a.m. and ends at 4 p.m. GMT.

The North American Session

By the time the North American session begins, the Asian markets will have been shut for several hours, while European traders will just be halfway through their day.

The United States, Canada, Mexico, and South American countries all participate in the North American session, although the United States is the session’s undisputed leader. Consequently, it is not surprising that the session’s highest volatility and highest participation rate may be seen in New York City.

How to trade the different Forex Sessions

North American hours effectively begin at 12 p.m. GMT due to the high volume of economic data releases and early trading in financial futures and commodities.

Since there is a significant lull in liquidity between when the U.S. markets close and when the Asian trading session begins, trading in New York is said to end at 8 p.m. GMT when the North American session ends.

There is typically higher trading activity during the overlapping Asian and European sessions, which can lead to greater volatility.

There will be a greater reaction to the Asian/European session overlaps and a less dramatic increase in price action during the European/U.S. sessions’ concurrence if the currency pair is comprised of cross currencies that are most actively traded during Asian and European hours (like EUR/JPY and GBP/JPY).

Regardless of the session in which the pair or its components are trading, the presence of scheduled event risk for each currency will still have a considerable influence on activity.

Trying to enter a trade during a currency pair’s most active hours can result in a bad entry price, missing the transaction entirely, or making a trade against the rules of a long-term or fundamental trading strategy.

Traders who don’t intend to hold positions overnight, on the other hand, depend heavily on volatility.

One of the first things a trader must do when dealing in foreign exchange is to decide whether high or low volatility is more suited to their trading approach. If you’re looking for significant price movement, trading during session overlaps or normal economic release times may be your best bet.

Once a volatility bias has been established, the optimal trading hours can be determined. The next step for a trader is to learn the time frames that see the most action for their chosen currency pair.

5-3-1: A strategy for trading the different Forex Sessions

Foreign exchange (FX) traders can use the tried-and-true 5-3-1 trading strategy as a simple framework from which to build the most effective trading approach according to their individual needs and preferences. Since there are so many currency pairs to choose from and since trading occurs around the clock, the 5-3-1 method is very useful for novice traders.

Here’s how it works:

1. Choose 5 major currency pairs

Only five major currency pairings should be your primary focus when employing the 5-3-1 trading method. Pick currency combinations based on the one or two major currencies you have the most experience with.

We’ll get to the phase of the method where you choose your pairs based on their busiest trading times in a little.

You can learn a lot about the behaviour of pairings by concentrating on only five of them.

2. Use 3 primary trading strategies

The next step is to settle on no more than three distinct trading strategies. Any combination of trading approach and technical analysis indicators above this cap will result in reduced profitability.

By narrowing your trading plan to only three techniques, you may do technical analysis using only the timeframes and indicators that are most relevant to your trading style.

It also prevents you from getting confused by employing too many indicators, which can lead to confusion if they start to contradict each other and show confusing signals.

3. Trade at 1 session each day

The 5-3-1 method advocates for a single daily trading window. The fact that the Forex markets operates around the clock is a major selling point. All-hours trading provides access to a large pool of buyers and sellers at any time of day.

In contrast, if you don’t check in on your trading account regularly, you risk missing out on profitable trades or being caught off guard by unanticipated market fluctuations.

The best time to trade depends on the activity level of the currency pairs you intend to trade. The foreign exchange market is typically broken up into three sessions: Tokyo, London, and New York. You can probably tell just by looking at the titles of the pairs which currencies are the most actively traded during each session.

The third element of this strategy is to choose how often you will check in on your deals. However, this is also the most important time for you to put your trading plans into action. You will be unable to follow your trading plan if you log in to trade a currency that has low liquidity at that moment.

Final Thoughts

You, as a trader, must decide when is ideal to enter or exit a market. In terms of trading styles, time zones, and your own availability. For example, the Asian trading session is ideal if you want to aim for a small number of pips in a somewhat stable market.

If you’re looking for large price swings and significant volatility, though, the London session and the New York open hours are your best bet.

However, if you’re free to trade whenever you like, experts agree that the overlap of trading sessions is the greatest time to make transactions. Trading occurs when people from all around the world’s financial hubs are present. There is adequate volatility, and numerous assets can be traded with ample liquidity and tight spreads.