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Forex Trading by the Numbers: A Critical Look at Trading Efficacy

Forex trading is the world’s most heavily traded market, with volumes in the region of $5 trillion daily. Among the most popular pairs to trade are the GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CAD, NZD/USD, EUR/JPY, USD/CHF GBP/JPY, and EUR/GBP. Most of the action takes place midweek, on Tuesdays, Wednesdays, and Thursdays, with light trading activity on Sundays and Mondays, and moderate trading on Fridays.

Forex Trading Computer Screen

To better understand the Forex trading market, it must be broken down into its core components. These include the New York trading session, the London trading session, and the Asian trading session. Trading activity also changes depending on seasonal factors. Summer and winter trading hours vary between each of these major markets, with the Australasian trading session beginning at 6 PM and ending 3 AM EST, the London trading session beginning at 3 AM and ending 12 AM EST, and the New York trading session beginning at 8 AM and ending at 5 PM EST.

Optimal Sessions for Trading Forex

moneyshow

Source: Moneyshow

The optimal time for trading forex depends upon the type of trader you are. Swing traders (position traders) are not bothered by timing. However, day traders are particularly interested in the optimal time to trade forex. An important concept known as volatility plays a big part in trading activity. Volatility is always greatest when the London trading session is operational. During London trading sessions, the New York trading session overlaps, and day traders can benefit from trading trends and breakouts. Volatility refers to the wide-ranging fluctuations in buy and sell prices of currency pairs. As alluded to earlier, mid-week trading is the best time to benefit the most from forex volatility.

It is worth pointing out that Forex trading effectively opens on Sunday nights at 5 PM EST and continues through Friday at 4 PM EST. Many people trading forex limit their buy & sell activity to the highest overlap sessions – those which include London, Tokyo, Sydney, and New York. Tokyo and Sydney overlap for a 6-hour window between 8 PM and 2 AM EST, while New York and London overlap between 8 AM and 12 noon EST. While there are 4 major forex markets around the world, there are in fact 15 operational foreign exchanges. Many experienced forex traders wait for these windows to trade major pairs, minor pairs, and exotic currency pairs. This certainly offers the greatest volatility, but a caveat is in order as we will see next.

Range Trading near Support and Resistance Levels

It is interesting to point out that the most profitable trades take place at off-peak periods. For example, the USD/JPY, the GBP/USD, the USD/CHF, EUR/USD, and AUD/USD are most profitable between midnight and 6 AM EST. These pairs tend to be least profitable between the hours of 6 AM and 2 PM, with profitability steadily increasing after that. It appears counter-intuitive that day traders would engage in Forex trading during off-peak hours, when there is low volatility. However, the reasons for the decreased profitability tend to be more closely related to failed strategies rather than the hours of trading activity. With range trading for example, many traders will buy when currencies are oversold, paying a premium, and then sell them when they are overbought, near resistance levels. But if resistance levels are broken, big losses can result.

As a rule, it is best to trade when there are overlaps, and particularly good to trade forex when there are important news releases affecting currency pairs. The release of economic data about new jobs, interest rates, inflation data, and monetary policy changes are paramount.

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