How Do Trading Hours Impact the Forex and Financial Markets?

March 19, 2017 05:30

time day 2.png

Dear Traders,

Price action is always popular with traders and rightfully so. But I always recommend traders to keep in mind the importance of time, too.

This article explains the impact of time on analysis and trading decisions. It also reviews how to be properly prepared for the trading day and week.

MT4 Forex and CFD trading platform

Does only price count, or time too?

Price action traders would probably say no without perhaps realising that charts are in fact a combination of both price and time. The right side (vertical axis) shows price and the bottom (horizontal) shows time.

So, going back to the question of does time count, my answer is yes, time is important in various ways such as my time factor pattern and fractal.

But time also impacts the market in other ways, such as trading zones to time frames. This article reviews the multiple angles connected to time, such as:

  1. the opening hours of the Forex market
  2. the trading sessions
  3. the importance of trading days.

trading times3.png
Source: babypips

The market trading times explained

The first obvious time boundary are the opening hours of the market. The Forex retail market is open 24 hours a day for 5 days a week, whereas major banks remain open during the entire week. The market is also closed during a couple of major holidays like New Year's Eve.

The notable advantage of the Forex market is its lengthy opening hours and hence the ease of market access, which stands in stark contrast with some of the other markets that are only open 6 hours a day.

The second important factor is that the trading day can be split in four different sessions because Forex spans the entire globe:

  1. Sydney session: this is the first session of the day.
  2. Tokyo session: starts with the Japanese market.
  3. London and European session: start within 1 hour of each other.
  4. New York session: the last session of the day.

Each of these sessions has open and closing times (see table 1 and 2 above). These times vary by one hour depending on summer and winter times.

The highs and lows of the session such as the Tokyo session are often used for support and resistance purposes, breakouts, and bounces. The same holds true for the London opening hour. Nenad even explains a trading system based on those hours in the video below.

Not all of the sessions are separated. The London and New York sessions in fact overlap for 4 hours a day, whereas London and Tokyo overlap one hour during the summer time.

The average pip movement per currency pair for three of the sessions is summarized in table 3. As you can see:

  1. The London session tends to have the biggest movement on average
  2. The movement also varies slightly from pair to pair - the NZD/USD for example shows little variance between the three sessions
  3. The quick rule of thumb for the Tokyo session is that the best currency pair movers will have at least one of the currencies located near the Tokyo time zone, like EUR/JPY, GBP/JPY.

The session and day could also occasionally impact the spread. For instance, the USD/CAD on Sunday could potentially have a higher spread an hour after the market opened than on for instance Monday during the New York session due to timing. The spread can change when volatility is very low or high, which could occur before and after weekend (low) or during news events (high).

The best pairs to trade are typically not the lower volatility pairs of each session, unless a trader is keeping a intra-week or long-term trade of course.

trading times4.png
Source: babypips

How the trading week unfolds

Another key factor is the location of the trading day within the trading week and its expected impact on price movement. This is also valid for the trading day within the trading month.

From my own trading experience I can say that the type of trading day has an impact on the expected volatility:

  1. Mondays tend to be slower days
  2. Tuesdays, Wednesdays, and Thursday's tend to see more movement and volatility
  3. Fridays tend see volatility and then a slow down when the weekend approaches

The main reason behind this phenomenon is relatively simple: the weekend. Price action tends to slow down before and after this break but pick up during the week.

The Monday market tends to be a bit sleepy and new boundaries of last week's trading action are slowly (re)tested. Price action has to almost 'warm-up'. Personally I want to see tone and mode of the week before entering a position, which is something I discuss in my weekly Forex video.

Friday is known as a profit taking day, which means it could be volatile with ups and downs as trading positions are sometimes closed prior to the weekend (depending on your trading style). Friday's price action slows down at the end the weekend comes closer. Looking into the benefits of volatility protection settings is always useful when discussing volatility.

time day.png

The other three days of the week – Tuesdays, Wednesdays and Thursdays – have a higher chance of seeing large(r) price movement, more trend continuations, less choppiness and less ranges. This does not imply that each trading day will behave as such. It simply states that on average trending price action and larger price movements have more chance of developing during these days.

Personally, I am a fan of trading on Tuesday, Wednesday and Thursday, but Monday afternoon and Friday morning can also be interesting depending on the market structure.

An identical logic can be used for the first and last trading days of the month. Swing traders could be more cautious on the first and last day of the month. The first day offers support and resistance levels that need to be tested, whereas the last day could be potentially more volatile due to profit taking.

Cheers and safe trading,

Chris

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