The forex market operates 24 hours a day, five days a week, offering a constant stream of opportunities for traders around the globe. However, not all hours are created equal in the forex market.
Knowing the optimal times to engage in currency trading can be a crucial factor in maximizing your potential profits and minimizing risks.
Quick pop quiz! In the ancient times, before Netflix and video streaming, what time of the day are TV ratings highest? If you said during prime time, then you would be correct!
What does this have to do with trading sessions?
Well, just like TV, “ratings” (a.k.a. liquidity) are at their highest when there are more people participating in the markets.
So when is the best time to trade forex?
Logically, you would think that this happens during the overlap between the two sessions.
If you thought that way, you’d only be half-right.Let’s discuss some of the characteristics of the two overlap sessions to see why.
Tokyo – London Overlap
The Tokyo-London overlap refers to the period when the Tokyo and London forex trading sessions are simultaneously active.
Here are some things to consider:
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Timing: This overlap typically occurs between 3:00 AM to 4:00 AM Eastern Time (ET). In terms of local time:
- Tokyo: 5:00 PM to 6:00 PM
- London: 8:00 AM to 9:00 AM
- Duration: The overlap lasts for about one hour, making it the shortest overlap period among major forex markets.
- Currency pairs: This overlap is particularly important for currency pairs involving the Japanese Yen (JPY) and the euro (EUR).
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Market characteristics:
- Increased liquidity: As two major markets are active, there’s often higher liquidity during this period.
- Potential for volatility: The convergence of Asian and European traders can lead to increased market movement.
- Lower trading volumes compared to the London-New York overlap.
- Trader participation: This period sees participation from Asian traders closing positions and European traders opening theirs.
- Economic data: Important economic data from both Asia and Europe may be released during or around this time, potentially causing market movements.
- Strategies: Some traders focus on breakout strategies during this period, as prices might start trending as European traders enter the market.
- Limitations: The relatively short duration of this overlap can limit some trading opportunities compared to longer overlap periods.
- Global context: This overlap bridges the gap between Asian and European trading, often setting the tone for the upcoming London session.
- Specific pairs: Crosses like EUR/JPY might see increased activity during this time due to the involvement of both European and Japanese markets.
Volatility during this session is pretty low for several reasons. Typically, there isn’t as much movement during the Asian session so, once the afternoon hits, it’s pretty much a snooze fest. Zzzzzz.
With European traders just starting to get into their offices, trading can be boring.This would be an ideal time to take a chill pill, play some putt-putt golf, or look for potential trades to take for the London and New York sessions.
London – New York Overlap
The London-New York overlap is often considered the most significant and active period in the forex market.
Here’ are somethings to consider:
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Timing: This overlap typically occurs between 8:00 AM to 12:00 PM (noon) Eastern Time (ET). In local times:
- London: 1:00 PM to 5:00 PM
- New York: 8:00 AM to 12:00 PM
- Duration: The overlap lasts for about four hours, making it the longest overlap period among major forex markets.
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Market characteristics:
- Highest liquidity: This period sees the highest trading volume and liquidity in the forex market.
- Increased volatility: Price movements can be more pronounced due to the high level of market activity.
- Tighter spreads: The high liquidity often results in narrower bid-ask spreads.
- Currency pairs: Particularly active pairs during this time include EUR/USD, GBP/USD, and USD/CHF, as well as pairs involving the Canadian dollar (USD/CAD).
- Economic releases: Many important economic indicators from both the U.S. and Europe are released during this window, often leading to significant market movements.
- Trader participation: This period sees the highest concentration of market participants, including large banks, commercial companies, and retail traders.
- Volume: It’s estimated that about 70% of all forex trading volume occurs during this overlap.
- Opportunities: The high liquidity and volatility can provide numerous trading opportunities for both short-term and long-term strategies.
- Risk management: While opportunities are abundant, the increased volatility also necessitates careful risk management.
- Global significance: As both London and New York are major financial centers, this overlap period often sets the tone for global forex markets.
According to the latest data from FXLIQUIDITY, an analytics service for the FX market, liquidity is at an optimum level around 10 am and 3 pm London time (use our Forex Market Hours tool to find your local time conversion).
This is when the real shebang begins! You can literally hear traders crack their knuckles during this time because they know they have their work cut out for them.
This is the busiest time of day, as traders from the two largest financial centers (London and New York) begin duking it out.For many forex traders, the London-New York overlap is considered the optimal trading time due to its high liquidity, tight spreads, and numerous trading opportunities. It’s particularly favored by day traders and those employing short-term strategies.
It is during this period where we can see some big moves, especially when news reports from the U.S. and Canada are released.
The markets can also be hit by “late” news coming out of Europe.
If any trends were established during the European session, we could see the trend continue, as U.S. traders decide to jump in and establish their positions after reading up what happened earlier in the day.
All this increased activity also means that price movements can be rapid and sometimes unpredictable, requiring traders to stay alert and manage their positions carefully!
The London Fix
Lastly, it’s important to know that it is during this period where the WMR Spot Benchmark Rate is determined.
The rate is set at 4 pm London time, and also known as the “London fix“.
A currency “fixing” is a set time each day when the prices of currencies for commercial transactions are set, or fixed.
Since currency prices fluctuate from second to second, a daily “reference point” is needed.
These rates are widely used by:
- Fund managers for portfolio valuations
- Multinational corporations for financial reporting Index providers
- Financial derivatives contracts
Banks and other financial institutions use this daily rate to set their currency exchange rates, which in turn determine the prices used in corporate foreign exchange transactions.
From a trading standpoint, this daily fix may see a flurry of trading in the market prior (generally 15 to 30 minutes) to the fixing time that abruptly disappears exactly at the fixing time.
Some traders even target the fixing period, attempting to profit from the increased volatility and liquidity.
Lastly, some European traders may be closing their positions as their day ends, which could lead to some choppy moves right before lunchtime in the U.S.
