What is the best time to trade FX? There is a right answer.
If there are just two things you know about the FX market, it might be that it is the largest financial market in the world, and that it trades 24 hours a day.
While the former is accurate, the latter creates some confusion. FX trading can occur round the clock, but that is a nature of the global currency demand and the different international time zones.
Many novice FX traders may not even realise that there are better times to trade FX than others, and these timings often correlate with stock trading hours. This might also explain why your FX day trading friend chooses to wake up at odd hours of the night to trade instead of trading during daylight hours.
Here’s what you need to know about the best time to trade forex.
FX trading is decentralised
To understand why FX trading occurs round the clock, we first need to realise that – unlike stock trading – FX is not traded through a platform or an exchange. FX trading is done through market participants who communicate via phone calls and Electronic Communications Networks (ECN).
That means FX trading is not limited by the closure of any single physical exchange, and can be traded as long as any of the global markets are open. Incidentally, as markets only open during weekdays, the FX market is also only open for 24 hours a day, five days a week, from Mondays at 5am (SGT) to Saturdays at 4am (SGT).
FX trading is all about volume
The next thing you will need to know is that the best timing for FX trading occurs when trading volumes are among their highest. Mooris Tjioe, investment analyst at Phillip Futures, explains why trading volumes matter.
“Higher FX trading volumes tend to result in higher volatility, which is a desirable feature for FX traders as it creates more trading opportunities. By comparison, periods of low volume tend to see less volatility in prices, and currency pairs might see minimal movement.”
The best time to trade FX
Tjioe highlights the four major foreign exchange centres (and their trading hours) that FX investors should keep their eye on.
- Sydney – 6am to 2pm (SGT)
- Tokyo – 7am to 3pm (SGT)
- London – 3pm to 11pm (SGT)
- New York – 8pm to 4am (SGT)
The highest trading volumes, he notes, occurs when the opening hours of more than one exchange overlap, with the heaviest trading volumes occurring during the overlap between the London and New York markets from 8pm to 12am (SGT).
“New York and London both account for over half of all FX trades, dwarfing volumes seen in most other exchanges,” Tjioe explains. “This is mainly as the US Dollar and the Euro are two of the most popular currencies for trading, with the US dollar making up around 88% of global trades, while the Euro comes in second – at around 32%. The Pound Sterling is a distant 13%. On currency pairs, the USD/EUR itself makes up around a quarter of all trades.”
Another trading opportunity arises between 7am to 2pm (SGT), when the Sydney and Tokyo markets overlap, which is suited for investors looking to trade specific pairs like the EUR/JPY.
On the other end of the spectrum, Tjioe points out that trading volumes tend to be at their thinnest from 12pm to 1pm (SGT), or the end of the Sydney-Tokyo overlap. “During such periods of time, most traded pairs tend to remain rangebound, which also gives rise to opportunities for breakout trades when the London and New York sessions open.”
How do experienced FX investors trade?
Based on the data from Phillip Futures, Tjioe notes that the best time to trade often depends on the needs and nature of the investor.
“Some of our customers trade based on regular data releases, so they trade actively on a regular weekly and monthly basis, while tracking high-frequency data releases,” says Tjioe. “Many choose to follow specific markets – such as the United States, and trade based on either their expectations of a positive or negative shock when the data is announced, or find trading opportunities in the ensuing volatility immediately following the announcement.”
“Other customers trade based on extraordinary announcements – such as political or social unrest, and seek opportunities through their own assessments of oversold or overbought conditions. One recent example was Brexit, that had arguably resulted in the GBP/USD being one of the most volatile FX majors in recent years, given the economic uncertainty over a satisfactory Brexit deal with the European Union.”
When should I trade FX?
“If investors had to pick only one session to follow for the most volatility, they would perhaps find the London session best suited for most of their strategies, as that session tends to see the most average pip movement for all the major currency pairs, out of all other sessions,” says Tjioe.
“Following that, if investors are looking for the most liquidity and wish to trade just about any currency pair, waiting for the overlap between the London and New York markets is perhaps the best strategy,”
“As an unrelated aside, compiled statistics have also shown that the midweek tends to see the majors exhibit the most volatility – specifically on Tuesdays and Thursdays.”
Any advice for FX investors when trading FX
FX traders often discount sudden negative shocks to the market – such as a sudden pandemic, a natural disaster, or high-level scandals – due to their unpredictable nature. Even so, Tjioe surmises that FX investors should follow regular data releases as they would be invaluable to their understanding of the economy and their trading.
“Such data releases might range from labour market statistics, to export figures, and inflation data. Markets tend to move when these data points come in lower or higher than expected, posing a corresponding negative or positive shock to the economy.”
“For investors just beginning to monitor the market, they could start by choosing a one or a few countries to monitor. The next step would be to select an online economic calendar that provides a comprehensive schedule of the economic data releases, both the expected forecasts and the past figures, and the actual data when it is announced.”
“This will allow investors to make a quick assessment of the trajectory of the underlying trend that the statistic is tracking.”
Ready to trade FX?
FX investors will benefit from trading with a powerful multi-asset platform like the MetaTrader 5 (MT5), with support from a leading regional brokerage like Phillip Futures. The Phillip MT5 platform offers a comprehensive range of assets for trading – from FX to CFDs – and all of your favourite indicators. It also includes Trading Central indicators which provide actionable insights, Expert Advisors, and the Autochartist pattern recognition tool.