The Forex 3-Session System

Reviewed by Thomas BrockFact checked by Vikki VelasquezReviewed by Thomas BrockFact checked by Vikki Velasquez

One of the interesting features of the foreign exchange market is that it is open 24 hours a day during the week. Around-the-clock trading allows investors from across the globe to trade during normal business hours, after work, or even in the middle of the night. However, not all times of the day are created equal when it comes to trading forex.

Although there is always a market for this most liquid of asset classes called forex, there are times when price action is consistently volatile and periods when it is muted.

What’s more, different currency pairs exhibit varying activity during certain periods of the trading day due to the general demographic of those market participants who are online at the time.

In this article, we will cover the three major trading sessions and explore the kind of market activity that can be expected during each.

Key Takeaways

• The 24-hour forex trading session consists of three manageable trading periods.
• Traders usually focus on one of the three trading periods, rather than attempt to trade the market 24 hours per day.
• Activity peaks in the Asian, European, and North American sessions, which are also called Tokyo, London, and New York.
• Sometimes sessions will overlap, such as a four-hour period for peak activity in both Europe and North America.
• Volatility is sometimes elevated when forex trading sessions overlap.

Understanding the 24-Hour Forex Market

A 24-hour forex (FX) market offers a considerable advantage for many institutional and individual traders because it guarantees liquidity and the opportunity to trade at any conceivable time. However, although currencies can be traded anytime, an individual trader can only monitor a position for so long.

Since most traders can’t watch the market 24/7, they are bound to miss opportunities, or worse—a jump in volatility can lead to a movement against an established position when the trader isn’t around.

Therefore, a trader needs to be aware of times of market volatility and decide when and how it is best to minimize this risk. They can and should adapt their knowledge of volatility and participation in the different sessions for a successful trading plan.

The Three Trading Sessions

Traditionally, the market is separated into three peak activity sessions and regions: the Asian, European, and North American sessions, which are also referred to as the Tokyo, London, and New York sessions.

The three cities represent the major financial centers for each of the regions. The markets are most active when these powerhouse areas are open for business. That’s when most banks and corporations in the respective regions conduct their day-to-day transactions, and there is also a greater concentration of speculators online.

Asian Forex Session (Tokyo)

When liquidity is restored to the FX market at the start of the week, the Asian markets are naturally the first to see action. Unofficially, activity from this part of the world is represented by the Tokyo capital markets and spans from midnight to 9 a.m. GMT.

Notable countries other than Japan also trade during this period, however. They include China, Australia, New Zealand, and Russia. Considering how scattered these markets are, it makes sense that the beginning of the Asian session starts before the standard Tokyo hours. Asian hours are often considered to run between 11 p.m. and 9 a.m. GMT.

European Forex Session (London)

The European session takes over to keep the currency market active just before the Asian trading hours come to a close. This FX region is very dense and includes a number of major financial markets. London takes the honors in defining the parameters for the European session.

Due to the presence of other capital markets (including Germany and France), this trading period can start before the official open in the U.K., while the end of the session is pushed back as volatility holds until after the close. But generally, European hours run from 8 a.m. to 5 p.m. GMT.

Note

Depending on the degree of activity, trading sessions can start before and extend beyond set or official trading times.

North American Forex Session (New York)

The Asian markets have already been closed for a number of hours by the time the North American session comes online, but the day is only halfway through for European traders.

This session is dominated by activity in the U.S., with participation from Canada, Mexico, and countries in South America. As such, it comes as little surprise that activity in New York City represents the high volatility and participation rate for the session.

Taking into account the early activity in financial futures, commodity trading, and the concentration of economic releases, the North American hours may unofficially begin before their GMT start time. The considerable gap between the close of the U.S. markets and the opening of Asian trading can mean a lull in liquidity. This puts the close of New York trading at 10 p.m. GMT, as the North American session closes.

Effects of Overlapping Trading Sessions

The Asian/European sessions overlap, sometimes creating more volatility due to increased trading activity during those hours. The figure below shows the uptick in the hourly ranges in various currency pairs at 7 a.m. GMT.

If the currency pair is a cross made of currencies that are most actively traded during Asian and European hours (like EUR/JPY and GBP/JPY), there will be a greater response to the Asian/European session overlaps and a less dramatic increase in price action during the European/U.S. sessions’ concurrence.

Of course, the presence of scheduled event risk for each currency will still have a substantial influence on activity, regardless of the pair or its components’ respective sessions.

For long-term or fundamental traders, trying to establish a position during a pair’s most active hours could lead to a poor entry price, a missed entry, or a trade that counters strategy rules. In contrast, volatility is vital for short-term traders who do not hold a position overnight.

Impact on Trading Strategies

When trading currencies, a market participant must first determine whether high or low volatility works best with their trading style. Trading during session overlaps or typical economic data release times may offer profit opportunities if substantial price action is desired.

A trader will also need to determine what time frames are most active for their preferred trading pair. For example, for the EUR/USD pair, the European/U.S. session crossover will provide the most movement.

There are usually alternatives to trading in this session, and a trader should balance the need for favorable market conditions with outlying factors, such as physical well-being. If a market participant from the U.S. prefers to trade the active hours for GBP/JPY, they must wake up early in the morning to keep up with the market.

Is Greenwich Mean Time (GMT) Still the Standard for Time?

No, GMT is no longer the standard for worldwide time. Since 1972, the standard has been Universal Time Coordinated (UTC). While their times are the same, GMT actually is a time zone while UTC is a time standard.

Can I Trade FX on Weekends?

Not really. Though the forex market is available 24 hours a day during the week, it closes at about 5 p.m. on Fridays and reopens at 5 p.m. on Sundays.

Is There a Best Time To Trade Forex?

Although there’s no official one, many traders feel that 8am – 12pm ET holds great potential because of the overlap of the London and New York trading sessions. Substantial data is released in the U.S. in these hours, there are many participants, and the market experiences volatility and liquidity (especially for USD pairs).

The Bottom Line

Due to the three major forex trading sessions across the world, the forex market is essentially open for business 24 hours a day, five days a week. As a whole, it offers substantial potential for profitable trading.

However, that doesn’t necessarily mean you should monitor and take part in every session. If you’re not a professional trader, lack of sleep could lead to exhaustion and errors in judgment.

An alternative may be to trade during the hours that comprise the European/U.S. session overlap, where volatility is still elevated, even though Japanese markets are offline.

Read the original article on Investopedia.