One of the most common advantages of trading the currency market is that it is open for 24 hours a day, 5 days a week. This gives anyone an opportunity to trade at his own free time. This is contrary to the equities and bond market which open and close within a few hours a day. Another key advantage of the forex market is that there are no commissions which are charged by brokerage firms in the equities and bond markets. A keen look at the currency market shows that different timeframes have their own characteristics. There are traders who have perfected the art (or science) of trading the European hours while others are perfect trading at the Asian markets. Others prefer the American market hours.
Asian markets are usually the first to open. It opens at 7PM (EST) and closes at 4AM (EST). It is conducted at the major Asian hubs which include the Tokyo, Hong Kong, and Singapore. Of the 3, Tokyo remains the most important market because of the role of Japan in the Asian markets. It is also the first session to open. Many traders use the session to study the market and use it as a benchmark to make their key trading decisions. The Shanghai session is also very important in setting the pace of what the day will look like. A good example is what happened a few weeks ago when the Chinese government devalued its currency. This led to the fall of the Shanghai Composite Index which had a trickle-down effect in the European and American markets.
For traders who are more risk tolerant, the most appropriate currency pairs to trade in this session are: USD/JPY, GBP/JPY, and EUR/JPY. This is simply because of the amount of volatility that the pairs carry with which could lead to huge profits. In addition, huge investment banks and hedge funds create many transactions (either buying or selling) EUR/USD dominated currencies. These moves create huge opportunities for traders. The table below shows the currency pairs volatility in the Asian market hours.
The European session is arguably the most important session among the 3 areas. According to a research by BIS, the London exchange is the home to dealing desks of large investment banks. In addition, huge corporate transactions are done at this time thus creating unparalleled volatility and liquidity. The chart below shows the volatility levels during the European markets.
As seen above, GBP/CHF and GBP/JPY are the most volatile crossing an average of 120 pips a day. 8 of the currency pairs above cross the 60 pip mark. Trading the 8 currency pairs offers traders an opportunity to make money with the increasing volatility. In addition, in the European session a lot of data from various countries is released thus raising buying and selling opportunities.
The New York session opens at 8Am ad closes at 5PM (EST). It is the second largest and busiest market place with a 19% market share of forex turnover. According to research, most of the deals in this market happen between 8Am and noon. The figure below shows the level of currency volatility during the American session.
As seen, the most volatile currency pairs crossing the 100 level mark are: USD/CHF, GBP/JPY, and GBP/CHF.
For traders that are more risk-tolerant, the currency pairs are ideal because of the increased volatility. A good example is during the current times when the American economy is doing very well while the emerging markets weaken. During this time, most investors searching for a safe haven look up to the American economy and buy bonds and equities. These transactions are done during this period making the US dollar a key currency. If there is an increase in FDI in the United States, then the dollar is expected to strengthen.
There are 2 overlaps in the financial markets: the European and American markets (8 A.M.–12 P.M. EST), and the Asian and European markets (2 A.M.–4 A.M. EST). When the European and American markets overlap, the biggest volatility is experienced because the range of trading tends to be 70% of average range for all currency pairs. Therefore, this is the best time to trade for traders who seek to benefit from huge volatility. On the other hand, the latter tends to be a bit less volatile.
To achieve maximum amount of success as a trader, time is the most important part of trading. There are traders who spend a lot of time reading their screens on a daily basis and make about 70 pips. On the other hand, there are traders who spend less than 3 hours a day and make the same 70 pips because they understand the nature of volatility in the market. In developing your strategy, I recommend that you spend time to create a schedule of your best times and stick with it.