The forex market is readily available at your service due to its liquid nature.
But that doesn’t mean any time is a good time to trade currency pairs.
In the past lessons, you've learned that forex trading predicts the appreciation and depreciation of each currency in a pair. There are many ways to predict price movement; fundamental trading is one way to do it.
Trading the news releases gives you an advantage in determining the most profitable time to buy and sell currency pairs.
Lesson Highlights
- The best time to trade currency pairs is when a market is trending. Trending markets are mainly caused by economic factors, such as economic data releases and changes in monetary policies.
- The forex market operates around the clock in four major forex sessions: the Tokyo, New York, London, and Sydney trading sessions.
- The most profitable time to trade currency pairs is when the market is active. An active market is highly volatile because of increased trading volume, providing opportunities for short-term trading.
Main Drivers of Market Fluctuation
Trading using the lens of fundamental analysis helps you focus on the external factors that affect the forex market, such as economic policies, political events, and market sentiments.
These factors either attract or repel traders into trading a currency, affecting the supply and demand of the currency. The supply and demand greatly impact the value of currencies.
Keeping up with these main drivers will help you time your trade with the potential market movement.
Economic Factors
The state of a country's economy dictates its currency’s value. Common indicators of economic health are a region’s fiscal policy, GDP, employment reports, inflation rates, and monetary policies.
Political Events
Political events have a direct influence on currency value appreciation and depreciation. If an event is positive, it will spike the market's demand for that currency. Otherwise, the shift in demand will cause the currency's value to decrease.
Market Sentiments
Traders' opinions regarding market conditions affect the direction of price movements.
Positive sentiments towards the market will drive up currency value. Meanwhile, negative sentiments lead to a decrease in demand, dragging down currency value.
News Releases and Forex Markets
When you’re trading forex, you should always be on the lookout for news releases. These releases, especially big news releases, can significantly impact the forex market's movement.
But what news releases do you have to consider? Well, not everything.
Fundamental traders follow the economic, political, and geopolitical news releases of regions relevant to the currencies they are trading.
Example Scenario: You’ve been meaning to open a position in USD/JPY market. One day, a famous Japanese brand files bankruptcy. This market news would cause a deflation in the Japanese yen’s demand as fundamental traders will logically stray away from buying JPY-based currency pairs.
But what about those trades with JPY as the quoted currency, like the USD/JPY pair?
For them, this is a profitable opportunity because the Japanese economy is experiencing depreciation, and the USD will strengthen against the JPY. Remember, your buy position will gain profit if the base currency rises against the quote currency.
The same goes when you go short USD/JPY.
If there is market news that would negatively affect the US economy, it’s best to exit a trade as fundamental traders expect the USD to weaken against the JPY. This way, you avoid profit losses due to the depreciation of USD value.
Major Market Hours in Forex
The forex clock operates around the clock. In other words, you can access the forex market all day during the weekdays. What makes this possible? It's because of the major forex trading sessions.
But remember that a single forex trading session can’t operate 24 hours a day. A specific session's operation hours match the formal business hours of its country's financial center.
New York Trading Session
The New York trading session starts at 12:00 UTC and closes at 21:00 UTC (09:00 PM EST). This is a major session and the second most heavily traded, which drives up its liquidity and volatility.
During these hours, the most active pairs are major currency pairs like the following:
- EUR/USD
- GBP USD
- USD/JPY
The New York trading session overlaps with the London trading session from 12:00 to 16:00 UTC. This four-hour period is the longest overlapping session and the most active forex trading time.
London Trading Session
The London trading session, which starts at 07:00 UTC and ends at 16:00 UTC, is the most traded market hour. In fact, roughly 43% of global trading activities happen during this session.
This session overlaps with the Tokyo and New York trading sessions, resulting in increased trading volume and liquidity.
The spike in price movement for the major currency pairs is most likely to happen during this session. The currency pairs that would experience significant price movement include:
- EUR/USD
- GBP/USD
- USD/CHF
Tokyo Trading Session
The Tokyo trading session is the third most traded session and the first one to open. It begins at 00:00 UTC (9:00 AM Japanese Standard Time (JST)) and ends at 09:00 UTC (06:00 PM Japanese JST).
This trading session also covers trading activities in other Asian countries like China, Singapore, and the Philippines.
Due to its large scope, the Tokyo trading session accounts for almost 20% of total trading activities in the forex market. It also overlaps with the Sydney session for a few hours.
The most traded currencies during this session are the:
- USD/JPY
- EUR/JPY
Sydney Trading Session
The Sydney session, or Aussie session, is a trading session in the Asia-Pacific region that starts the forex day trading. It begins at 10 PM and ends at 7 AM UTC.
Despite being quieter and having relatively lower volatility and demand, this session is still among the major trading sessions that yield profitable opportunities for your trading position.
The most active and profitable currency pairs during this session are the following:
- AUD/USD
- NZD/AUD
Maximizing the Forex Trading Sessions
When trading in a different session, you should always be on the lookout for economic data and news releases from the relevant regions, as those will surely drive market movement.
Active forex hours are based on overlapping trading sessions. Obviously, there will be an increased trading volume of activities when two sessions overlap.
Pro tip: You can enjoy numerous profitable opportunities if you trade during the active market hour due to a spike in trading activities.
Okay. You've learned the different factors when deciding the best time to trade currency pairs. In the next lesson, you'll learn about percentages in points (pips) and how you can use them to manage trading losses and profits.
