The forex market is open 24/5, but that doesn't mean you can expect the same trading outcome from whenever you place a trade. Here's why.
Forex trading is not an easy investment. It is widely known that forex traders lose money and a lot of them end up quitting the market. There are various factors that might cause a trade to fail such as poor money management, misuse of leverage, and uncertain market conditions. In order to be successful, forex traders must know exactly what they're doing and make the right decisions. This includes understanding how the market works, what strategy to use, and which broker to trust.
But apart from all that, a trader also needs to know when to open trade. While the forex market is open most of the time, it's not always active and offers the same amount of opportunities every time. Let's dive deeper and see how you can use it to improve your trading performance.
Understanding Forex Market Sessions
Before we go any further, it's important to understand that the forex market is divided into four trading sessions. Here's the brief explanation for each of them (in EST):
- London: 3 a.m. to 12 p.m. (noon)
- New York: 8 a.m. to 5 p.m.
- Sydney: 5 p.m. to 2 a.m.
- Tokyo: 7 p.m. to 4 a.m.
It's worth mentioning that these sessions can overlap, and when it happens, the market is naturally busier since more people are active.
Does Timing Matter in Forex Trading?
The answer is yes, timing is indeed very significant in forex trading. In order to truly understand the importance of timing, let's see the following example.
This time, we're using the data of approximately 24 million real trades that were placed across the GBP/USD currency pair in the 12 months ending in Q1, 2015. The following chart shows the likelihood of trader profitability in hours.
Based on the chart above, we can see that if a trader opened GBP/USD trades between the hours of 04:00 and 05:00 EST, then they could've gained a profit 47% of the time. Meanwhile, on the opposite end, if a trader opened GBP/USD trades between the hours of 20:00 and 21:00 EST, then they could've gained a profit 55% of the time.
Now, let's take a look at the average rate of hourly price changes in GBP/USD from 2005-2015.
The chart indicates that the hour-to-hour price changes vary at different times of the day. On average, the Sterling moved 22 pips from 04:00 to 05:00 EST. In contrast, it moved less than 4 pips from 23:00 to 00:00 EST. So, volatility is highly different throughout the day.
If we compare the two charts, we can see that there's a clear negative correlation between volatility and trader's profitability. They're less profitable when the market is highly volatile and more profitable when the market is less volatile. The reason lies in the trader's behaviors. Most traders tend to use range trading strategy which basically involves buying an asset when the price is low and selling it when the price is high. This type of trading method can work if the price is not breaking key price levels and continues to move in relatively narrow ranges, which typically occurs in quieter markets.
So, in order to make a profit, traders with range trading strategy should simply avoid trading during the most volatile hours.
Please note that the above scenario is only an example. The truth is that different strategy is best used at different times. This is why traders need to know exactly what they need in order to win the trade and generate significant profit.
When is the Best Time to Trade Forex?
Many traders believe that the best time to trade is when the market is most active. This occurs when two or more sessions open simultaneously, particularly between 8 a.m. and noon, or the overlap of the New York and London sessions. It's worth noting that these two trading sessions account for more than half of the whole forex trades, so the market is typically very volatile and liquid during the period.
Other traders prefer to trade when the market is quiet. In this case, the Asian session is a great choice because it has low liquidity and low volatility. It is also less risky because the prices tend to move slower. In the previous example, we've mentioned that this method is suitable for traders that use range trading or mean reversion strategy.
Please note that there are some exceptions. Firstly, the market can be extremely volatile (even during slow hours) after a major economic or political news release. Secondly, the market can also suddenly be quiet and less active when there's a huge global event like the World Cup because people are distracted.
The Bottom Line
We can conclude that timing is highly important to consider in forex trading. Trading at the right hour can make you generate significantly more profit, so it's unwise to just wing it and trade whenever you want without thinking about the market conditions.
When looking for the best time to trade, you should choose based on the strategy that you use. If you're a day trader, it's better to trade when the market is volatile. You can get more trading opportunities and take profits from extreme price movements. But if you're a range trader, it's better to trade when the market is quiet and less volatile. Also, please make sure to monitor the release of big economic events and news releases as they can affect the market and increase market uncertainty.