Many first-time forex traders hit the market running. They watch various economic calendars and trade voraciously on every release of data, viewing the 24-hours-a-day, five-days-a-week foreign exchange market as a convenient way to trade all day long. Not only can this strategy deplete a trader's reserves quickly, but it can burn out even the most persistent trader. Unlike Wall Street, which runs on normal business hours, the forex market runs on the normal business hours of four different parts of the world and their respective time zones, which means trading lasts all day and night.

TUTORIAL: Beginner's Guide To MetaTrader 4

So what's the alternative to staying up all night long? If traders can gain an understanding of the market hours and set appropriate goals, they will have a much stronger chance at realizing profits within a workable schedule.

Know the Forex Markets

Currency trading is unique because of its hours of operation. The week begins at 6 p.m. EST on Sunday and runs until 5 p.m. on Friday.

The best time to trade is when the market is most active, as not all hours of the day are equally good for trading. When more than one of the four markets are open simultaneously, there will be a heightened trading atmosphere, which means there will be greater fluctuation in currency pairs.

When only one market is open, currency pairs tend to get locked in a tight pip spread of roughly 30 pips of movement. Two markets opening at once can easily see movement north of 70 pips, particularly when big news is released (Need a refresher on forex concepts? "Top 6 Questions About Currency Trading" covers the basics).

First, here is a brief overview of the four markets (hours in EST):

  • New York (open 8 a.m. to 5 p.m.): New York is the second largest forex platform in the world and is watched heavily by foreign investors because the U.S. dollar is involved in 90% of all trades, according to "Day Trading the Currency Markets" (2005) by Kathy Lien. Movements in the New York Stock Exchange (NYSE) can have an immediate and powerful effect on the dollar. When companies merge and acquisitions are finalized, the dollar can gain or lose value instantly. (Learn one way to predict movements in the NYSE in "Which Direction Is The Market Heading?")
  • Tokyo (open 7 p.m. to 4 a.m.): Tokyo, the first Asian trading center to open, takes in the largest bulk of Asian trading, just ahead of Hong Kong and Singapore. The currency pairs that typically have a fair amount of action are USD/JPY, GBP/CHF and GBP/JPY. The USD/JPY is an especially good pair to watch when the Tokyo market is the only one open, because of the heavy influence the Bank of Japan has over the market. (Learn about this influence in "How to Profit From Interventions in Forex Markets," and about currency pairs in "Using Currency Correlations to Your Advantage.")
  • Sydney (open 5 p.m. to 2 a.m.): Sydney is where the trading day officially begins, and while it is the smallest of the mega-markets, it sees a lot of initial action when the markets reopen on Sunday afternoon because individual traders and financial institutions try to stabilize after all the action since Friday afternoon.
  • London (open 3 a.m. to noon): The U.K. dominates the currency markets worldwide, and London is its main component. London, a central trading capital of the world, accounts for roughly 34% of global trading, according to a report by IFS London. The city also has a big impact on currency fluctuations because the Bank of England, which sets interest rates and controls the monetary policy of the GBP, has set up shop in London. Forex trends often originate in London as well, which is a great thing for technical traders to keep in mind. (Learn more about how the central banks impact currency pairs in "Why Interest Rates Matter for Forex Traders.")

Overlaps in Forex Trading

The best time to trade is during overlaps in trading times between open markets. Overlaps equal higher price ranges, resulting in greater opportunities. Here is a closer look at the three overlaps that happen each day:

  • U.S./London (8 a.m. to noon): The heaviest overlap within the markets occurs in the U.S./London markets. More than 70% of all trades happen when these markets overlap because the U.S. dollar and the euro are the two most popular currencies to trade, according to  Lien. This is the most optimal time to trade since volatility is high.
  • Sydney/Tokyo (2 a.m. to 4 a.m.): This time period is not as volatile as the U.S./London overlap, but it still offers a chance to trade in a period of higher pip fluctuation. EUR/JPY is the ideal currency pair to aim for, as these are the two main currencies influenced.
  • London/Tokyo (3 a.m. to 4 a.m.): This overlap sees the least amount of action of the three because of the time (most U.S.-based traders won't be awake at this time), and the one-hour overlap gives little opportunity to watch large pip changes occur.

(For more in-depth information about what kinds of market activity can be expected in each period, read "The Forex Three-Session System.")

Impact of News Releases on Forex Markets

While understanding the markets and their overlaps can aid a trader in arranging his or her trading schedule, there is one influence that should not be forgotten: the news release.

A big news release has the power to enhance a normally slow trading period. When a major announcement is made regarding economic data – especially when it goes against the predicted forecast – currency can lose or gain value within a matter of seconds.

Even though dozens of economic releases happen each weekday in all time zones and affect all currencies, a trader does not need to be aware of all of them. It is important to prioritize news releases between those that need to be watched versus those that should be monitored. (For more insight, read "How to Trade Forex on News Releases.")

Examples of bigger news releases include:

For more information on these indicators, read "Economic Indicators to Know."

The Bottom Line

It is important to take advantage of market overlaps and keep a close eye on news releases when setting up a trading schedule. Traders looking to enhance profits should aim to trade during more volatile periods, while monitoring the release of new economic data. This balance allows part-time and full-time traders to set a schedule that gives them peace of mind, knowing that opportunities are not slipping away when they take their eyes off the markets or need to get a few hours of sleep.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.