One of the greatest features of the foreign exchange market is that it is open 24 hours a day. This allows investors from around the world to trade during normal business hours, after work or even in the middle of the night. However, not all times are created equal. Although there is always a market for this most liquid of asset classes, there are times when price action is consistently volatile and periods when it is muted. What's more, different currency pairs exhibit varying activity over certain times of the trading day due to the general demographic of those market participants who are online at the time. In this article, we will cover the major trading sessions, explore what kind of market activity can be expected over the different periods, and show how this knowledge can be adapted into a trading plan.
Breaking a 24-Hour Market into Manageable Trading Sessions
While a 24-hour market offers a considerable advantage for many institutional and individual traders, because it guarantees liquidity and the opportunity to trade at any conceivable time, it also has its drawbacks. Although currencies can be traded anytime, a trader can only monitor a position for so long. This means that there will be times of missed opportunities, or worse - when a jump in volatility will lead the spot to move against an established position when the trader isn't around. To minimize this risk, a trader needs to be aware of when the market is typically volatile and decide what times are best for his or her strategy and trading style.
Traditionally, the market is separated into three sessions during which activity peaks: the Asian, European and North American sessions. More casually, these three periods are also referred to as the Tokyo, London and New York sessions. These names are used interchangeably, as the three cities represent the major financial centers for each of the regions. The markets are most active when these three powerhouses are conducting business as most banks and corporations make their day-to-day transactions and there is a greater concentration of speculators online. Now let's take a closer look at each of these sessions.
Asian Session (Tokyo)
When liquidity is restored to the forex (or, FX) market after the weekend passes, the Asian markets are naturally the first to see action. Unofficially, activity from this part of the world is represented by the Tokyo capital markets, which are live from midnight to 6 a.m. Greenwich Mean Time. However, there are many other countries with considerable pull that are present during this period including China, Australia, New Zealand and Russia, among others. Considering how scattered these markets are, it makes sense that the beginning and end of the Asian session are stretched beyond the standard Tokyo hours. Allowing for these different markets' activity, Asian hours are often considered to run between 11 p.m. and 8 a.m. GMT.
European Session (London)
Later in the trading day, just before the Asian trading hours come to a close, the European session takes over in keeping the currency market active. This FX time zone is very dense and includes a number of major financial markets that could stand in as the symbolic capital.
However, London ultimately takes the honors in defining the parameters for the European session. Official business hours in London run between 7:30 a.m. and 3:30 p.m. GMT. Once again, this trading period is expanded due to other capital markets' presence (including Germany and France) before the official open in the U.K.; while the end of the session is pushed back as volatility holds until the London fix after the close. Therefore, European hours are typically seen as running from 7 a.m. to 4 p.m. GMT.
North American Session (New York)
By the time the North American session comes online, the Asian markets have already been closed for a number of hours, but the day is only halfway through for European traders. The Western session is dominated by activity in the U.S., with a few contributions from Canada, Mexico and a number of countries in South America. As such, it comes as little surprise that activity in New York City marks the high in volatility and participation for the session.
Taking into account the early activity in financial futures, commodity trading and the concentration of economic releases, the North American hours unofficially begin at noon GMT. With a considerable gap between the close of the U.S. markets and open of the Asian trading, a lull in liquidity sets the close of New York exchange trading at 8 p.m. GMT as the North American session closes.
|Session||Major Market||Hours (GMT)|
|Asian Session||Tokyo||11 p.m. to 8 a.m.|
|European Session||London||7 a.m. to 4 p.m.|
|North American Session||New York||noon to 8 p.m.|
|Figure 1: Major market session hours|
|Figure 2: Three-market session overlap|
|Figure 3: Currency market volatility|
|Copyright U.S. session) while price action is subsequently more muted during the market's other high points (the Asian/European session overlap).
In contrast, if the pair is a cross made of currencies that are most actively traded during Asian and European hours (like EUR/JPY and GBP/JPY), there will be a greater response to the Asian/European session overlaps and a less dramatic increase in price action during the European/U.S. sessions' concurrence. Of course, the presence of scheduled event risk for each currency will still have a substantial influence on activity, regardless of the pair or its components' respective sessions.
Forex EducationUncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
Forex EducationThe most frequently traded currency pair is the euro/U.S. dollar. The euro is the base currency in the pairing, while the dollar is the quote currency.
Forex FundamentalsDiscover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
Forex EducationThese steps will make you a more disciplined, smarter and, ultimately, wealthier trader.
Forex StrategiesEuro traders can execute three simple but effective strategies that take advantage of repeating price action.
Forex EducationEvery day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
EconomicsA currency swap involves two parties exchanging a notional principal and interest to gain exposure to a desired currency.
Forex FundamentalsForecasting exchange rates can help minimize risks and maximize returns. Here are three popular methods for forecasting exchange rates.
Investing BasicsChanges in technology have turned trading into a career field that’s easy to enter. But staying in it is a different story.
Investing BasicsDeciding whether to trade stocks, foreign exchange or futures contracts typically comes down to risk tolerance, account size and convenience.
A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
A forex trading strategy can easily be implemented to profit from a market reversal signal that comes from the sanku, or ... Read Full Answer >>
Use wedge-shaped patterns to identify bullish or bearish price action when trading currencies in the foreign exchange (forex) ... Read Full Answer >>
You could use time segmented volume (TSV) to build a forex trading strategy, which allows you to compare volume data to determine ... Read Full Answer >>
Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>