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One of the forex’s fundamentals is when you may participate in the market. Traditionally, most financial instruments in the international currency market can be traded 24 hours from Monday till Friday. In particular, foreign exchange transactions are conducted in different trading sessions that span the whole business day. So what is a forex session? And why should you know about this concept? The answers would be detailed in this article.
What Forex Session is it Now?
Put simply, a trading session refers to the trading hours between any market’s opening bell and closing bell. In the session, traders, market makers and other institutional players actively engage in the market to transact investment offerings in a certain locale. Financial markets such as forex, stock or commodities differently determine trading sessions. Of which, both forex and cryptocurrency empower the 24-hour execution of trades.
Normally, currency trading is not under the supervision of a centralised exchange or clearinghouse, but rather the over-the-counter (OTC) market. That is, forex transactions are distributed to a network of financial centres across the globe and conducted in various trading hours. In the forex market, there are four primary trading sessions for their respective centres as follows:
- Sydney: 10 PM to 7 AM GMT+0;
- Tokyo: 12 AM to 9 AM GMT+0;
- London: 8 AM to 5 PM GMT+0;
- New York: 1 PM to 10 PM+0.
Additionally, forex trading is possibly performed in other minor time windows entailing Frankfurt, Wellington/ Auckland, Hong Kong and Singapore.
The presence of at least one trading session allows investors to enter the market all the time from Monday through Friday. When two or more trading sessions cross, the forex market often records the increased trading volume and higher liquidity in normal market conditions; this facilitates your engagement in the market without fear of either moving prices significantly or finding no counterparty to finalise your deals.
Having said that, should major news come to light or traders erroneously understand the market signals, much more purchasers may swarm to the market or conversely, a growing number of vendors sell financial assets. This phenomenon would lead to a huge gap between demand and supply and consequently greater volatility. A volatile market might translate to a nuisance for numerous traders, especially beginners who lack the experience to handle the negative impacts of unfavourable price fluctuations. However, some may seize better payoff opportunities from such high volatility.
Unless unexpected events above are counted, speculators would benefit from an overlap of two or more sessions which implies the most movable time of traded currency pairs. The following picture demonstrates the most active trading hours last from 1 PM to 5 PM GMT+0 when two biggest financial centres simultaneously operate. This 4-hour interval is appropriate for transactions concerning the US dollar and Europe-related currencies, typically the euro.
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However, not all currency pairs should be bought and sold within such a time frame. Imagine you open a long position of EUR/JPY (Euro/ Japanese yen), the best time for trading is when London and Tokyo sessions overlap. Provided that you trade outside of these hours, it can be more challenging to find sellers who offer your required amounts of euro at desired prices. As a result, you have to wait for a longer time than expected to close the position or accept higher prices to quickly get out of the trade.
Therefore, the in-depth understanding of trading sessions and when to open a position would make you well-prepared for proper trading strategies.
The Forex 3-Session System
Among the potential benefits of forex trading, 24-hour access is a common reason to whet traders’ appetite for the market. As already mentioned, international currencies are continually transacted in different time frames which are classified into three sessions by jurisdiction: North American, European and Asian trading sessions. They are also denominated as New York, London and Tokyo forex sessions because those cities are primary financial hubs in their respective regions. What’s more, the US dollar, euro and Japanese yen are the most traded currencies in forex.
Asian Trading Session (Tokyo)
Commonly known as the Tokyo session, the Asian forex session is literally stretched from noon on a Monday morning of a trading week to 9 AM GMT+0 if traders are settling down in London. Japan-based speculators may start their trades at 9 AM till 6 PM JST (Japanese Standard Time) when trading desks in Tokyo banks enter the market. Meanwhile, these hours would be converted to the interval of 7 PM to 4 AM EST (Eastern Time) for those staying in New York.
Apart from the Tokyo market, however, the Asian region today involves other financial hubs from commodity-based economies (e.g. New Zealand or Australia) and emerging markets (e.g. China). Considering activities from those countries, Asian trading hours, in reality, run from 10 PM GMT+0 on the last Sunday to 9 AM GMT+0 on the following Monday, with the first opening of the Wellington and Sydney sessions (Australia).
Compared to European and North American forex sessions, their Asian counterpart records lower liquidity and lower volatility. This result does not come as a surprise because the Japanese yen is considered a safe haven whose price is supposed to level off or appreciate if the world is thrown into social or economic turmoil. What’s more, the currency has a low-interest rate, so most transactions are conducted for the yen carry trade.
As for commodity-based currencies, they are pretty sensitive to price fluctuations of a certain merchandise. Thus only those who look for gains from those changes invest in those currencies. Meanwhile, EME currencies, typically the renminbi, are predominantly exchanged with the US dollar. Those analyses indicate transactions in the Asian session are just restricted to some trading purposes, hence leading to a lower market capitalisation.
Though, the peaceful nature of the Asian trading session enables speculators to easily recognise levels of support and resistance. This may help identify suitable entry and exit points as well as manage risk better.
European Trading Session (London)
When the Asian time zone is bound to end, European financial centres are going to make their entries and the market liquidity is elevated. However, flocks of speculative traders to the market when two trading sessions cross may result in the short-term high volatility. Accordingly, professional traders may exploit the highly volatile market to make substantial money from Japanese yen crosses such as GBP/JPY or EUR/JPY.
As London proves itself one of the most important and influential economies worldwide, the European forex session implies the London session which spans from 8 AM to 5 PM GMT+0. Similar to the Asian session, its European counterpart also includes a number of financial hubs such as Frankfurt, Milan or Amsterdam. Economic situations and political stability of many European countries motivate an increasing number of participants in the market.
Three commonly traded currencies in the region include the British pound (GBP), Euro (EUR) and Swiss franc (CHF) which is regarded as a safe haven as the Japanese yen. Inevitably, as the second dominant currency, the euro can be either strengthened or weakened by major announcements of any given country, for example, the sovereign default faced by the Greek government after the economic downturn of 2007-08 devalued the euro. Despite the Brexit event, the British pound is still affected by macroeconomic news related to the eurozone.
North American Trading Session (New York)
The North American trading session is primarily influenced by the financial and banking activities of the US market. So New York inevitably becomes a main participant in the region, followed by smaller contributors such as Canada, Mexico and several nations from South America. The North American session begins at 12 PM or 1 PM and closes at 9 PM or 10 PM GMT+0 depending on summertime or wintertime. Those trading hours are equivalent to 8 AM to 5 PM EST when US banks start their trading desk activities such as internal and interbank transfer of millions of dollars, which directly produces high trading volume in the market.
During 4 hours when both London and New York sessions concurrently operate, the market marks the highest liquidity and sometimes volatility due to a soar in speculators, especially on the EUR/USD which is the most traded currency pair. Other US dollar-related instruments can be easily exchanged in those hours because the currency remains the leading status in the vast majority of currency trades, approximately 87%.
The US dollar’s value is remarkably impacted by economic information and news; normally, their publishing time can be the morning hours or range from 1.30 PM to 3 PM GMT+0. In addition, speculators on this session should pay attention to the important announcements of the Federal Open Market Committee (FOMC) in its meetings regularly organised at 6 PM GMT+0. The geopolitical factor is worth noting as well. The recent US-China trade war is a typical example, which worries Asia-based speculators on currency pairs related to these economies.
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