There are different trading sessions in the forex market, and each of them is characterised by varying levels of volatility. Finding the best trading hours requires you to trade during the overlap of two different trading sessions. For example, the overlap between the London and New York sessions creates a high level of volatility, and the same can be said for the London and Asian sessions overlap.
Why are session overlaps highly liquid and volatile?
Foreign exchange trading is unique because of its hours of operation. The week begins at 5 pm EST on Sunday and runs until 5 pm on Friday. This means institutions and hedge funds exchange currencies daily with large volumes of orders. However, the trading volumes vary since there are different forex time zones.
The trading week usually begins with the Asian session. The Tokyo session is dominated by trading activities in Asian countries, including Japan, the Philippines, Singapore, etc. Tokyo is the first trading center to open. The currency pairs that are most liquid and volatile are those containing the Australian dollar, United States dollar, New Zealand dollar, and Japanese yen.
The London session begins before the Asian session ends. This marks the first overlap, and these hours are usually very volatile. This is because institutions and big players in the market from different countries and time zones are trading currencies simultaneously. London, the major trading capital of the world, accounts for roughly 43% of global trading. Furthermore, the London session overlaps with the New York session. Given that these are the largest trading centers in the world, these hours are usually the most volatile hours of the day.
Other factors affecting forex market volatility
1) High-Impact News
High-impact news refers to significant news events that tend to produce significant price movements in the forex market. They include;
- Gross Domestic Product: Gross domestic product (GDP) is the standard measure of the final goods and services in a country during a certain period. GDP is the total value of everything produced within a country's borders; as such, it's critical economic data. To avoid double-counting, GDP includes the final value of the product but not the parts that go into it.
- Unemployment Data: The unemployment rate is the percentage of unemployed individuals in an economy among individuals currently in the labor force.
- Nonfarm Payroll: Nonfarm payroll employment is a compiled name for goods, construction, and manufacturing companies in the US. It does not include farm workers, private household employees, or non-profit organisation employees. This high-impact news event is usually released on the first Friday of each month.
News releases lead to increased volatility as the forex market participants react to the changes in the value of different currencies.
2) Bank Holidays
Bank holidays are characterized by low trading volume and lower volatility because the banks provide a significant portion of the forex trading volume.
3) Time of the Day
Some hours of the day have lower volatility since there are fewer market participants. For instance, at the end of a trading day, there is less volatility as traders liquidate their positions and wait for the significant trading centers to reopen the next day during the volatile forex sessions.
Factors to consider when choosing the best time to trade
1) Your Trading Style
It would help if you tailored your trading style to the session or hours you're trading. If you love to trade in highly volatile markets with significant price swings, then the best time to trade would be during session overlaps. But, if you like to trade consolidation ranges, you can trade the Asian session or during less volatile hours of the day.
2) The Forex Pairs Being Traded
Forex pairs have different characteristics and varying levels of price movements depending on the forex hours. Some currency pairs love to move quickly in the London and New York session and become less volatile in the Asian session. Before deciding when to trade, find out the trading hours for the currencies that comprise your favored pairs. Currency pairs like NZD/JPY and AUD/JPY will have price swings more than major pairs in the Asian session since they contain the Japanese yen.
3) The Economic Calendar
Finally, the hours you decide to trade will be influenced by the economic calendar. If you're a conservative trader, you may need to avoid high-impact news in one session or take advantage of medium-impact news in another.