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The forex markets, or currency markets, operate 24 hours a day with the exception of weekends when the markets are closed.
Due to this round-the-clock nature in the forex markets, traders from different parts of the world can partake in speculating on the currency movements. However, every now and then, one might ask the question: what the best time is to trade forex?
The answer to this basically depends on one thing and one thing only:Volumes.
When volumes increase, it can have a trickle-down effect. The reason behind this is because volumes rise, usually, when there are more participants in the markets. When there are more participants in the market, there is more demand and supply.
Therefore, due to the increase in the number of participants, which then increases the volume, you automatically have higher liquidity.
Consider trading at a time when liquidity is low.
This has certain drawbacks. You will often find that the spreads, which is the difference between the bid and ask prices, tend to be wider. Therefore, trading can get more expensive.
When volumes are low, it’s also difficult to exit your positions due to the lack of liquidity in the markets. If you do manage to exit your positions, you will most likely get a bad fill. A bad fill is where you tell your broker the price at which you want to close your position, but because of lack of liquidity, the broker fills you at the best available price.
This can lead to higher trading costs and even lower profits, as explained in the article “When is the best time to trade Forex”.
Therefore, knowing the best time to trade forex is important. But to understand this, we must know something about trading sessions in forex.
Forex Trading Sessions
“Forex trading session” is a name given to a session. There are three main trading sessions in the world of currency trading.
- The Asian trading session which covers geographical locations such as Tokyo, Singapore, Australia & New Zealand
- The European trading session which covers London and Frankfurt
- The U.S. trading session which covers New York
When it comes to forex trading, it is London (and the rest of Europe) and the United States that have the highest volumes. Most of the trading activity takes place in these locations. Therefore, the best time to trade forex is when you have an overlap of two sessions.
Contrary to popular opinion, it is London where the highest FX transactions take place. However, it is the U.S. trading session that has more volatility.
Every day, for one hour, there is an overlap of the Asian trading session and the European trading session. Likewise, later in the day, there are a few hours of overlap between the European trading session and the U.S. trading session.
It is ideal to trade forex during these times, because this is when you can experience the highest liquidity. Because the USD is the world’s reserve currency, the economic events from the US play a major role in global economics.
Therefore, the US trading session is also prominent because this is when the US based economic events are also released. The late US session, and the early Asian trading session, are often periods when you will see low volatility with prices mostly trading flat.
Why Should You Trade During These Specific Times?
Most forex traders are either intraday traders or scalpers. Therefore, trading during these specific times of overlapping sessions can greatly increase the liquidity in the markets, thus allowing you to be able to better exit your trades.
If you are a swing trader who prefers to keep their positions open over a few days or weeks, the above doesn’t apply. However, you should still pay attention to your traders during such times as the wider spreads could increase the risk of your open positions being triggered with a stop.
Knowing when to trade and when not to is something that traders will realize over a period of time. If you trade the markets for a short period of time, you will notice the big difference between the volumes and the liquidity when you compare the Asian trading session to that of the European or the US trading session.