Trading Basics

Now that you have a better understanding of the forex market, its benefits, and the key players involved, let's delve into when you can actually trade currencies.

Remember the advantage of a 24-hour market? The forex market operates continuously throughout the week, from 10:00 PM GMT Sunday to 10:00 PM GMT Friday. This extended schedule offers significant flexibility for traders to participate at a time that suits their needs.

Trading Sessions:

While the forex market operates 24/5, trading activity is not uniform throughout this period. Global financial centers have their peak trading hours, creating four main sessions:

• Sydney Session (Sunday evening – Tuesday morning GMT)

• Tokyo Session (Monday morning – Wednesday afternoon GMT)

• London Session (Tuesday morning – Thursday afternoon GMT)

• New York Session (Tuesday afternoon – Friday evening GMT)

The overlap periods between these sessions often see the highest trading volume due to the combined participation from multiple regions.

When to Trade?

While the forex market offers 24/5 access, some periods are generally considered more active than others. Understanding these peak trading times can be helpful for making informed trading decisions.

The London-New York Overlap (1:00 PM GMT - 4:00 PM GMT):

This time zone overlap between the London and New York sessions is often referred to as the "power hours" in forex trading. Here's why:

• Increased Liquidity: With both major financial centers active, trading volume reaches its highest point during this period. This translates to more buyers and sellers in the market, making it easier to enter and exit positions.

• Enhanced Volatility: The increased activity during the overlap can lead to more significant price movements in various currency pairs. This volatility can present potential opportunities for traders who can capitalize on price fluctuations.

• Economic News Releases: Many key economic indicators are often released during these hours, which can significantly impact currency valuations. Being aware of upcoming news releases can help traders anticipate potential market movements.

While the London-New York overlap offers potentially lucrative opportunities, it can also be a more fast-paced and volatile environment. New traders may want to consider these factors when choosing their trading times.

Which Currencies to Trade?

The currencies that you can trade because of their high activity and large movements are as follows:

• EUR/USD

• GBP/USD

• USD/CHF

• USD/CAD

• GBP/JPY

• GBP/CHF

Now let’s look at the characteristics of each of the trading sessions.

Asian Session (22:00 – 08:00 GMT)

The Asian forex trading session kicks off at 10:00 pm GMT with the opening of the Sydney market and concludes at 4:00 pm GMT with the Tokyo market closing. While Tokyo is the dominant forex center in this timeframe, other major players like Hong Kong, Singapore, and Sydney contribute significantly to the session's activity. The Japanese yen (JPY) reigns supreme as the most traded currency during this session, accounting for roughly 16.5% of all forex transactions.

Here's a breakdown of the key characteristics of the Tokyo session:

• High Volume: Around 21% of global forex trading happens in this session.

• Fluctuating Liquidity: Liquidity, which refers to the ease of buying or selling a currency without impacting its price, can be somewhat limited at times. This can lead to currencies trading within a specific range, particularly if there were significant price movements in the preceding New York session.

• News-Driven Market: Most trading activity occurs at the session's start, coinciding with the release of economic data from Australia, New Zealand, and Japan. This news can trigger stronger movements in currency pairs involving JPY, AUD, and NZD.

London Session (08:00-16:00 GMT)

London's crown as the global forex capital is well-deserved. Here's why the London session reigns supreme:

• Unmatched Volume: Boasting over 32% of global forex transactions, London leads the pack in terms of trading activity.

• Highly Liquid Market: With high liquidity, buying and selling currencies becomes seamless, minimizing market impact.

• Trend Central: The London session is known for frequent market trends, both up and down, offering ample opportunities for traders.

• Tighter Spreads: Typically tighter spreads during this session translate to lower transaction costs for traders.

• Mid-Session Lull: Volatility dips slightly around lunchtime as traders take a break, before picking up again as the New York session approaches.

• Potential Trend Reversals: Keep an eye out for possible trend reversals near the session's close, as European traders might lock in profits.

New York Session (13:00-21:00 GMT)

The baton passes from London to New York as the US session opens, coinciding with the return of London traders from their lunch break. Here's a look at the defining features of the New York session:

• Solid Volume: The US session captures around 19% of global forex activity, making it a significant player.

• USD Dominance: The US dollar (USD) takes center stage, with a whopping 85% of trades involving this currency, leading to high market-moving potential.

• Overlapping Liquidity: During the overlap with the London session, liquidity remains high, facilitating smooth trading.

• News-Driven Mornings: The release of economic data at the session's start can trigger market movements.

• Fading Activity: Liquidity and volatility tend to wane in the afternoon hours.

• Friday Funk: Friday afternoons can be particularly quiet, with a higher chance of trend reversals in the latter half of the day.