An Intern Learns - When To Trade And When Not To Trade
Welcome to another addition of An Intern Learns. Today I’m going to tackle the topic of when to trade and when not to trade. Here at MahiFX, we have found that we have people trading on our platform from all over the world. We have people trading in countries such as England, New Zealand, India, Malaysia, Pakistan, Netherlands, Australia and Hungary. With all these people trading all over the world this has made me think about the fact that the markets have different levels of volatility at different times of the day. This is due to the fact that not everyone is trading at the same time. You may be wondering ‘well how does that affect me? If I’m trading happily away in England, how does someone’s trading in America affect me?’ Well depending on which currency pairs you are trading it could have a big effect. In fact, you may even want to choose which currency pairs you trade with based on the markets varying levels of volatility throughout the day. In this blog I’m going to explore this as well as the characteristics of some of these trading times. I’m also going to have a look at some important aspects of the London trading session, as not only are we based in London, but this is also considered one of the most important times in the trading day.
Lets start with the basics of different trading time zones.
Trading Forex is divided across the world into four major zones – the Tokyo session, the Sydney session, the London session and then finally the New York session.
While MahiFX is based in Christchurch, we also have an office in London so I’ll discuss time zones from a GMT point of view. The trading day starts with the Sydney session, as they obviously see the new day first. The Tokyo session then follows quite close afterwards. This zone includes most of Asia and so is sometimes also called the Asian session. The London session happens next and includes all major financial centres in Europe, Africa and even the Middles East, but is dominated by the activity in London and countries like Germany or France. Lastly, the American session comes in to play and is headed by New York. Generally speaking, most places start trading at 8am and close around 4 – 5pm.
However based on their geographic locations, some of these sessions overlap, and as a trader this is one aspect that can have an impact on your trading. This overlapping creates a seamless day of trading and it’s this that allows people to trade 24 hours a day. For example London session starts at 8am GMT, the New York session starts at 1pm GMT (8am EST) and for the next four hours these two sessions are on the go at the same time! Similarly, the Sydney session and the Tokyo session overlap. At 10pm (GMT) the Sydney session starts and 2 hours later at midnight (GMT) the Tokyo session starts. This overlapping has a big impact on your trades. If you remember from previous blogs, high market volatility is great for your trading as this leads to tighter spreads. This occurs when there are a lot of traders in the market place, and this of course happens when trading sessions overlap.
One of the biggest overlaps is between the New York and London sessions. This overlap occurs for 4 hours, from 1pm – 4pm GMT. This is great for us in the UK as these two powerhouses of the Forex world overlap and create some great market conditions for us. This will work for you if you’re trading currencies pair combinations involving the EUR, GBP, USD, and CHF etc.
I’d like to share some thoughts on what to consider during the London session. London has been a centre of world trade for many years and this is thanks to its ideal location – it’s almost a centre point for the rest of Europe. About 30% of all forex trades happen during the London session. The USD is also a very popular currency to trade with and so the GBP/USD pair remains one of the most liquid in forex. London is a major place of trade and the GBP is often in high demand for transaction purposes. The demand for the GBP is highest during the European session, 8am – 5pm GMT, with even more action normally scheduled for midday when the US market opens. This leads to high liquidity and the potential for lower transaction costs due to tighter spreads. However all this demand also leads to quite a lot of volatility in the market – so keep on your toes! If you see a trend starting in the London session, it will often continue until the beginning of the New York session. Conversely, trends can sometimes reverse at the end of the London session as traders over Europe close their positions at the end of the day.
When trading the London session, remember that the Tokyo and Sydney sessions will not be open and so pairs involving these currencies may be a little inactive. This will be fine for swing or position traders, but the scalpers may be a little bored at times. In terms of a fundamental analysis, traders have noted that GBP based pairs tend to react quite strongly to surprise economic data releases.
There are also specific days when it’s better to trade and when not to trade. Studies have shown that the best times tend to be during the middle of week, with Monday and Friday tending to be a bit quiet. I can imagine all the traders taking an early Friday and this leaving the markets a bit inactive! Also major holidays should be avoided. For example, America’s Thanksgiving holiday on the fourth Thursday in November might lead to a bit of inactivity on the USD side of things, while Christmas and New Years will cause slightly less action throughout the European markets too.
This blog is the penultimate blog from an Intern Learns. The next blog is going to be the final one and I’m going to be wrapping up with some of the most important lessons I’ve learned. There’s so much to learn in foreign exchange and I hope that all the topics I’ve covered in this series are enough to give you a good start into your own trading adventures! So I really hope you look out for the last blog of the series to get some last little learnings to help with your trading.