When is the best time of day to trade Forex?

One of the many advantages of the Forex market is that it is open for trading 24 hours a day. Unlike the stock market, the currency market works according to the normal business hours of the three business centres spread across different time zones. Traders have the freedom to trade as and when they choose, depending on their particular interests. Objectively, there is no such thing as the best time to trade Forex for any one trader - it all depends on individual preferences, aims and strategies.

In this article, we will take a look at the effect that day and night in various parts of the world have on various currency pairs - and by extension, on your trading. We'll focus on the two major fundamental forces - supply and demand - to identify the best times to trade Forex for you.

Forex liquidity

Liquidity - being able to find a counterparty for every transaction - can be a problem in some financial markets, but not in Forex. Whilst liquidity isn't relevant when choosing the best time of day to trade Forex, it is worth mentioning for background knowledge.

Most retail traders trade with a market-making broker, who is always ready and willing to fill an order for them. In these cases, the only time that problems may occur is when the broker itself is having problems filling his orders on the Interbank. An example of this is during the CHF move on 15 January 2015, when the Swiss National Bank lifted the euro peg - a gap is a gap to everybody.

Forex is a real liquidity miracle and price gaps are so rare that it usually takes a beginner trader a few months of trading before he sees one with his own eyes.

Forex volatility

Volatility looks at how strong price moves can be at a particular time of the day, and it varies greatly in the currency market per pair and at each time of the day.

It is vital for traders to be able to understand volatility, because the vast majority of trading strategies are incompatible with periods of high volatility. Market tests clearly indicate that adjusting a trading schedule according to a strategy-preferred volatility can make the difference between major losses and major profits, even when all other things are equal.

For example, an oscillator-based trading strategy that best fits ranging markets and hunts the 'bounce offs' off the key levels will not benefit much from level breakouts caused by high volatility. Whenever creating or considering a strategy, work out what level of volatility it will work with and apply it accordingly. Volatile periods aren't always the best times of day to trade Forex.

The why

Why do volatility levels vary per instrument per day and why does the price move at all? The answer is simply down to supply and demand. The market, Forex or any other for that matter, is moved by the sheer amount of unfilled orders. The more of them there are and the higher in volume they are - the more volatility there will be on the market.

Now let's take a look at who the main market movers are. Institutions place the biggest orders in the largest quantities and between set times. Unlike private traders who have the freedom to trade as they choose, institutions operate according to the working hours of the trading capitals of the world. It's for this reason that the 24 hour Forex trading day is split into three international trading sessions - Asian/Pacific, London/European and North-American.

Forex trading sessions

The trading day officially starts in Australia, when the Sydney and New Zealand institutions open at around 9 am (GMT+10) marking the beginning of the Asian-Pacific trading session. In the two following hours they are joined by Tokyo, where the largest part of Asian currency trading takes place, closely followed by Hong Kong and Singapore.

It is at the beginning of the Asian-Pacific session on Sunday nights that the currency market opens for the week, and when individual traders and institutions attempt to stabilise after relevant events that might have taken place over the weekend. This is the only time of the week when gaps occur regularly, meaning that unless gaps are specifically what you are after, trading over the weekend isn't the best time to trade Forex.

At 7:00 AM GMT, the Asian/Pacific session slowly gives way to the London/European session. Frankfurt - the financial heart of Europe - starts an hour ahead of London, but this activity lag is mostly neglected. At 12:00 PM GMT the North-American trading session begins, starting in New York and later followed by Los Angeles. By nightfall in Los Angeles, the markets will slow down bringing an end to the current trading day.

Since world trading sessions gradually flow into one another, some overlapping takes place, but we'll look into this later.

What happens when institutions go to work?

The morning hours are the key time for announcements from monetary policy makers and other relevant news releases to take place. The beginning of the day is also when institutional traders are most active, as it's the best time of day for them to trade Forex. This activity contributes to the rise in volatility levels.

Currency relevance is logical. If it is morning in London, then it will be the Bank of England releasing financial news, with British companies hedging orders to protect their future pound sterling based purchases from abroad. So it makes sense that it will be the British banks and funds speculating on the market. British private traders are most active in the day time for this reason, but their impact will be relatively insignificant. The reason for this is due to the small volume they produce and also because private traders are less currency bound. The scenario will apply for other countries and currencies, so if you are chasing market volatility as part of your trading strategy, then the best times of day to trade Forex for you would coincide with the bigger movers.

The most volatile time of day for the European currencies and currency pairs that include them would be the London session. In this case we are mostly talking about EUR, GBP and CHF. Likewise, currencies of the countries that are geographically located in the Asian-Pacific region, like JPY, AUD, NZD and to a lesser extent SGD, HKD, will be most traded during the Asian-Pacific session. Lastly, USD, CAD and MXN spike in volatility during the North-American session.

Now, as mentioned above, due to the fact that trading sessions overlap, in addition to the fact that currency pairs often consist of currencies from different regions, volatility spikes get somewhat skewed. London/New York would be the heaviest overlap. There's no surprise there, considering that EUR/USD is the most traded pair and GBP/USD is the third most traded. Tokyo/London is another big one, since this is the time when most US movers are relatively inactive, giving the floor to crosses like EUR/JPY and GBP/JPY. Finally, because Tokyo is a whole 16 hours ahead of Los Angeles, this overlap sees the least trading activity.

Elephant in the trading pit

One other thing to keep in mind is that most of the currency market volume comes from the Forex spot market, which is also the one that retail traders mostly trade. While the spot market is open 24/6, the futures market is tied to physical exchange centres. More specifically, to the Chicago Mercantile Exchange and several of its partners across the US and abroad (called introducing brokers). The importance of this fact is that it further reinforces the notion that in the futures market, all pairs can only be traded against the US dollar.

Know your market

There are many ways to find out what the average volatility is for a specific currency pair on a specific timeframe, through supporting software like Autochartist, offered by Admiral Markets. When carrying out your research, make sure your strategy appreciates volatility rather than suffers from it, and you will easily identify the best times to trade Forex. Whilst the Forex market is open 24 hours a day, it doesn't mean you have to constantly be watching it. In order to succeed in Forex, you need a clear, alert mind. Ensure your strategies allow you to trade accordingly without having to sacrifice your existing routines.

Read also: Best days of the week to trade Forex