Adversity has arrived- what to do? You have no way forward, no back-up plan, you are clearly under pressure. Question is how to clear the mind in this state. Most greats in their respected fields will tell you a clear cut way to solving any hard problem, is to know the basics and have a strategy. Yes a strategy will lead you to react at the right moment. “If you do not know where you are going, you will wind up somewhere else. -Yogi Bera”
This perfectly reflects what a trader has to do in the forex market. Is the knowledge of what the market is, who trades it and why it is preferred sufficient? Well there is one thing that needs to be addressed for the perfect trading strategy and that is timing. Even though the forex market trades 24 hours of the day everyday – one will find times when the market moves slowly. These are periods of decreased liquidity. There are times when it will be difficult for a trader to make a profit. So when should traders participate on the forex market? Let’s find out.
When is the best time to trade?
Most trading is done within the business hours of the major financial cities. This is because various countries have active traders in those specific time frames. Hedge funds and various other businesses become dynamic in this period. The businesses provide the funds in order to execute trades with one another. The British pound for example can most actively be traded in the business hours of Great Britain as there is liquidity in this particular currency at the time.
The banking industry plays a major role in this field as they provide the funds (since they hold the accounts). A variety of financial instruments are used to speculate and hedge against different movements in prices. Banks provide plenty of investment instruments like currency reference warrants which can be bought and sold by the general public.
You should trade:
- Within the business hours of the country which currency you are working with.
- When there is multiple overlapping markets open at the same time.
- In the middle of the week – most liquid and active period (Tuesday, Wednesday and Thursday).
You should not trade:
- During times when volumes are low.
- During a holiday as the amount of volume decrease during this time.
The forex market has different levels of volumes trading in different time zones of the world. The main time zones are the Asian/Tokyo, London and New York zones. Their trading times are as follows:
- Asia / Tokyo
The trading session for Asia starts 23:00 and closes at 08:00 (GMT). The Tokyo session is also referred to as the Asian session because Tokyo has historically been the financial capital of Asia (Tokyo market hours are between 00:00 and 06:00 [GMT]). An interesting fact to know about this session is that it is the third largest forex trading centre in the world as approximately 21% of forex trading takes place during this session.
Forex transactions for this session are not exclusive to Tokyo alone; it branches out to Hong Kong, Singapore, New Zealand, Russia and Sydney. Commercial companies and central banks are usually the main participants to partake in this session as Japan’s economy is export dependent. The liquidity is thinner than in the other sessions meaning that it takes time before the market moves but when it does it sets the tempo for the rest of the day and often other sessions look to this session to set their strategies.
- Europe / London
Also known as the European session; London has always been considered the forex trading centre of the world as about 30% of trading takes place during this time. The official business hours in London runs from 7:30 to 15:30 (GMT) however London is not the only economy trading in the Euro zone and so we need to include all the other European countries. This new time scope falls between 7:00 and 16:00 (GMT).
The London session is the most liquid as it crosses with two other major sessions and due to the large amount of transactions that take place it is also considered the most volatile session which can be the trend setter for the New York session.
- North America / New York
The session includes the USA, Mexico, Canada and other South American states. This implies large volatility and extra liquidity during the overlap with Europe.
The North American session starts at 12:00 and ends at 22:00 (GMT) with a large gap between the close of the US and the Asian session. The time between the North American and Asian session represents a period of thin liquidity and spreads that widen which makes it almost impossible for a scalper to make money.
The session has high liquidity in the morning as it overlaps with Europe and most economic reports are released during the open meaning that the North American session has a lot of power to affect change in the direction of a trend.
The European & North American Overlap:
Occurring when the New York and London are active, this overlap increases liquidity in European currencies such as the Sterling Pound, Euro and Swiss Franc. The time period here is 12:00 to 16:00 (GMT) and the major markets in play are London, New York and Frankfurt.
The Asian & European Overlap:
Occurring when Asia and Europe are both active, the overlap starts at 7:00 until 8:00 (GMT). This is a great chance to start trading the USD/JPY, EUR/JPY, GBP/JPY, CHF/JPY currency pairs.
Volatility within currency pairs
Before going into detail about which currency pairs are the most volatile we first have to understand what volatility is. Basic definition of volatility is as follows:
According to Investopedia volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index, commonly the higher the volatility the higher the risk of the security.
Therefore, volatility is the measure of risk taken to get a reward from an investment or trade. It measures the risk associated with a certain transaction.
This leads us to the most volatile currency pairs in the forex market, also known as the Major currency pairs, which are as follows:
- AUD/USD (Australian Dollar vs. United States Dollar)
- EUR/USD (Euro vs. United States Dollar)
- GBP/USD (Great British Pound vs. United States Dollar)
- USD/CAD (United States Dollar vs. Canadian Dollar)
- USD/CHF (United States Dollar vs. Swiss Franc)
- USD/JPY (United States Dollar vs. Japanese Yen)
Firstly, let us look at the differences between ranging pairs and trending pairs.
Ranging pairs and trending pairs
The trading of this method involves the currency pair to move within a range. Thus the currency pair moves in a limited space where we can safely assume there is an imaginary floor and ceiling.
Most ranging traders buy at the bottom with the intention to sell at the top. This is a method practised by unadventurous individuals. More money can be made if the person increases the leverage on the currency pair.
Example of a ranging pair
Examples of ranging pairs:
This type of trading involves confirming a trend has formed. Traders must learn to take profits strategically after successfully calling a trend
There is more risk involved (variance), but the reward for getting this trade is substantial.
Example of a trending pair
Examples of trending pairs:
Quick Country Profiles
- Main imports: manufactured goods, machinery, fuels, foodstuffs
- Import suppliers: manufactured goods, machinery, fuels, foodstuffs
- Main exports: manufactured goods, fuels, chemicals, food, beverages, tobacco
- Export markets: S., European Union
- Main imports: oil, foodstuffs and wood
- Import suppliers: China, USA, Australia, Saudi Arabia, South Korea, Indonesia and the United Arab Emirates.
- Main exports: cars, electronic devices and computers
- Export markets: China, USA, South Korea, Taiwan, Hong Kong, Singapore, Thailand and Germany.
- Main imports: non-auto consumer goods, fuels, production machinery and equipment, non-fuel industrial supplies, motor vehicles and parts, food, feed and beverages
- Import suppliers: European Union, China, Canada, Mexico and Japan.
- Main exports: computers, waste and scrap, processed foods, etc
- Export markets: Canada, United Kingdom, China, Mexico, Israel
Even though the forex market is open 24 hours a day 5.5 days a week doesn’t mean that you should be trading night and day. You need to select the times that suit you best and develop a niche within that time zone. I’m sure this comes, somewhat as a relief to those of you who are hooked up with a Red Bull filled drip.