Separating a 24 Hour Market into Manageable Trading Sessions

[RichardCox 10]

One of the most often discussed features of the of forex market is the fact that it is open 24 hours a day and does not experience some of the same abrupt closes that are seen in other asset classes. This, of course, allows for greater levels of participation from traders all over the world and provides greater flexibility for those looking to trade after work, during normal business hours, or in the early AM. But even with this flexibility, it should be remembered that not all of these trading periods should be considered equal, and this factor can have some significant effects when technical analysis strategies are implemented.

 

While the foreign exchange market is clearly the most liquid and dynamic market in the world, there will be times when price activity is highly volatile and other periods where price activity will be more muted. In addition to this, specific currency pairs will show variations in momentum during certain trading periods, and this comes as a result of changing demographics of the active markets during those periods.

 

Here, we will look at the characteristics of the main trading sessions so that traders can have a better idea of what to expect during different periods, as this can help traders of all strategy types to make more informed decisions when constructing a trading plan.

 

Identifying Trading Sessions that are Manageable

 

The added time periods in place for the forex markets can provide some key advantage for both retail and institutional traders (increased liquidity, reduced limitations in closing trades), but there are some drawbacks here as well. Some of these negatives can be seen in the fact that traders only have the ability to watch their open positions for so long, and for some trading styles, this can make things difficult when markets stall. Additionally, there will be many occasions where traders miss opportunities because they are simply not able to be watching market activity at that time.

 

Times of increased market volatility can also cause close stop losses to be hit once positions are established, so in order to minimize these potential risks, it is important to know when markets are likely to become volatile as a means for deciding on optimal trading times. By most accounts, forex markets can be divided into 3 sessions: the European, North American, and Asian sessions, or by their city names, the London, New York, and Tokyo sessions.

 

Since these three cities are all major financial centers, markets tend to have the most activity when banks and private companies in these areas are conducting business, and as a result, many speculators concentrate on these time periods.

 

The Tokyo Session (Asian Trading)

 

As traders enter the market after the weekend closing, Asian markets will be the first to see injections of liquidity, and the Tokyo session is typically defined as occurring from 12am to 6am GMT but some of the countries that fall into this trading period include Russia, China, Australia and New Zealand. To be sure, these markets are disparate and scattered, and the true parameters of the Tokyo session will fall outside these hours.

 

The London Session (European Trading)

 

Later, just prior to the close of Asian trading, the London session begins to being the next wave of market liquidity. In London, formal business hours are from 7:30 am to 3:30 pm GMT, but factoring in markets such as France and Germany, the hourly parameters are extended here as well. In this case, market volatility tends to remain consistent into the London fix following the close. Thus, the wider European trading period can be defined as the hours between 7 am and 4 pm GMT.

 

The New York Session (North American Trading)

 

As North American trading comes to trade, markets in Asia have been closed for hours, and the trading day is half-finished for those active in Europe. Most of the activity seen during this time is put through in the US, with smaller transaction amounts seen in Mexico, Canada, and various regions in South America. Given these factors, it should not be a surprise that the official open of the New York markets is what brings most of the period’s volatility and overall market participation.

 

With early trades in the futures and commodities markets, and the fact that most economic news releases are scheduled in the early parts of the day, North American hours are generally considered to start at 12 pm GMT. Since there is a wide gap from the end of the New York session and the start of the Tokyo session, there is a drop in market liquidity during this period, and trading volatility tends to see substantial decreases in anticipation of this occurrence.

 

How Time and Market Participation Influences Price Action

 

Now that we understand the basic time framework for the 3 main sessions, it is important to look at the ways these participation levels will influence overall price action. One element to consider is the fact that a currency tends to be most active when its nation’s markets are open for business. This should not be surprising, given that more international transactions with that currency are likely to take place at these times. In these cases, domestic companies, banks, and investors from these regions will use their own currencies to make their international transactions. For these reasons, sessions with multiple active currencies (such as the USD/CAD in the North American session) could produce greater volatility because both regions are active at the same time.

 

Additionally, it is more difficult to buy and sell currencies in a nation where the main banks are closed for the day. For example, if a Japanese company wanted to make a multi-billion Dollar purchase in the US, the Japanese company would likely wait until US banks are available and there is more liquidity in US Dollars. If this is not done, major orders in thin markets could result in unfavorable price quotes and extra costs that have nothing to do with a change in value of the product itself.

 

Session Overlaps

 

This is also why prices tend to see more activity when market sessions see overlaps. Looking at the attached price graph, we can see that there are 2 major peaks throughout the trading day - the end of the Asian session / beginning of the European session, and the confluence of the North American and European Sessions. The second example (four hours long) is much larger and there are volatility benefits that are created from this added liquidity.

 

But this is not only the result of transactional flows, but also the result of market moving economic releases (usually from 12 pm to 2 pm GMT) that can guide the trading direction for the day and bring major increases to price volatility.

 

Using this Information When Trading

 

Market activity is clearly one of the most important factors to consider when placing trades. Otherwise sound strategies can be disrupted when they are implemented during the wrong trading session. Establishing long term positions during volatile hours can result in unfavorable exit and entry levels or missed trades. Conversely, shorter term positions that depend on volatility would tend to be unwise during market lulls (low price volatility) such as that which is seen in between sessions.

 

So when placing real trades, it is important to consider these factors as market volatility is usually a predictable market element and can vastly influence the success or failure rate that is associated with certain types of strategies. In addition to this, you must consider the actual currencies that are being traded, as volatility in these specific pairs will also depend on the activity usually seen during the session. While these tendencies are not in place in the market 100% of the time, understanding regions and session periods will give trades vital information that can heavily influence the outcome for your personal strategy style.

[crabbydog 10]

Good article, but when do you think the US session closes? You open it at midday GMT, although I had understood it was considered open 1pm or 2pm. I had understood it closed at 8/9 pm GMT.

 

thanks

:missy:

[RichardCox 10]

Good article, but when do you think the US session closes? You open it at midday GMT, although I had understood it was considered open 1pm or 2pm. I had understood it closed at 8/9 pm GMT.

 

thanks

:missy:

 

Yes, I think you are right that there is some flexibility here in the possible definitions. It sounds like you are suggesting that the sessions correspond more with the open and close of the stock market but some would argue that the larger shifts in liquidity and transaction flows coming from North American sources start as early as two hours before that.

[crabbydog 10]

Yes, I think you are right that there is some flexibility here in the possible definitions. It sounds like you are suggesting that the sessions correspond more with the open and close of the stock market but some would argue that the larger shifts in liquidity and transaction flows coming from North American sources start as early as two hours before that.

 

That'd make sense because. London seems busy well before the stock market opens, 7am or even a bit earlier.

[kuokam 10]

Good day Sir,

I thought London session was more important than New york? I can trade both but I prefer to enter my trades during LS.

 

Why sould I not enter a longer term trade during volatile sessions? If short term trades can survive, so can long term ones, no?

 

Kuokam

[ForexTradingRobots 10]

Biggest moves in any given day happen between 0330 and 0830 PST--- Those correspond with London/US openings

[steve46 12]

Good day Sir,

I thought London session was more important than New york? I can trade both but I prefer to enter my trades during LS.

 

Why sould I not enter a longer term trade during volatile sessions? If short term trades can survive, so can long term ones, no?

 

Kuokam

 

Sir or Madam

 

You are correct about London open....it is clearly the most important market these days.

 

and the basis of the thread is probably this Internet link

 

The Forex Three-Session System

 

not a problem particularly (except for the original poster's questionable ethics)...too bad the gentleman doesn't have something original (and useful) to contribute to the topic.

 

 

Best of luck to you

Steve

Edited December 3, 2012 by steve46

[kuokam 10]

Many thanks for the link

 

Well, it is better to imitate big minds than to improvise poorly, don't you think?

 

Sir or Madam

 

You are correct about London open....it is clearly the most important market these days.

 

and the basis of the thread is probably this Internet link

 

The Forex Three-Session System

 

not a problem particularly (except for the original poster's questionable ethics)...too bad the gentleman doesn't have something original (and useful) to contribute to the topic.

 

 

Best of luck to you

Steve

[steve46 12]

Many thanks for the link

 

Well, it is better to imitate big minds than to improvise poorly, don't you think?

 

In this and many other instances, I often quote Mark Twain who suggested "it is better to be silent and be thought a fool, than to open one's mouth and remove all doubt".....

 

Good luck to you

 

Steve

[Traitor1 10]

Steve46 = my hero

 

+1