It’s a known fact that the best time to trade in stocks is around the opening and closing hours because the market is the most volatile at that time. The middle hours of are mostly avoided as prices are slower and kind of flat. Trading tends to slow down during lunch hours making trades take longer to complete. That’s a stock market fact, but how is it with forex trading?
Although the forex market is open throughout the day, it tends to be more active during particular sessions. The spreads are especially tighter when two markets in different geographic locations overlap each other. During this overlap the volume of trades in the market is high and volatility increases resultantly. Its ideally the best time for trading especially for the intra-day traders.
Important to note though, this increase in volume caused by increased activities owing to more traders entering the markets from either end of the trading world are generally confined to the currencies found in both locations where the overlap happens. Every kind of trader is attracted to the markets during the overlap period because the increased volume and high volatility provides the best opportunity to profit.
The European session represented by Frankfurt and Paris overlap the London session. This however is doesn’t change the markets that much given the low volumes of the European session. However, when the London session overlaps the New York session, its an earthquake as both markets are independently big with potentially trillions of dollars traded in each session. The combination of both sessions is what moves the markets the most due to the volume of trades involved. The Sydney market also overlaps the Tokyo session
During the New York session, the volume of trades is high. This means the USD and its crosses are moving heavily. Imagine the USD along accounts for about 45% of the volume of all currency transactions. This means that for every 100 transaction made, 45 of them had USD crosses. This is true when it comes to other session overlaps as the relevant currency crosses have their volatility go high. So the different forex pairs will be affected differently during the overlap.
We know sessions are about session, but how about time frames? Is there a favorable time or time frame to trade it?
There’s no clear cut answer to this. The forex market never sleeps. It’s a 24hour market with three major sessions and two minor ones – Tokyo, London, and New York, the other two being Sydney and Frankfurt. Each of these opens at almost the closure of the other and some even run through the opening of the other keeping the markets live 24 hours every day. This makes it a very liquid market with lots of opportunities to trade across the space of the 24hour day. Besides, there are so many currency pairs to be traded and each currency in the pair is affected by different macroeconomic factors in the particular currency’s economy which coincidentally affects the value of both currencies in the pair one against the other though the economy of one of the currencies wasn’t affected by the happenings in the other currency’s economy.
Say for example you’re trading the EURUSD and some very positive high impact news comes from the US indicating a bad performance of a major sector in the economy. Since prices move on perception, this will be interpreted as an indicator of a weakening US economy and will weaken the USD’s performance in the EURUSD pair in the terms of value each against the other. This will translate into the EUR increasing in value against the USD much as the EUR zone economic performance indicators never changed. So the US economic performance didn’t have any direct impact on the European economy but yet had a direct effect on the performance of the EUR against the USD. The effect was ‘perceptional’ not ‘substance’.
With forex trading therefore, attention shifts from ‘time’ to trading style. What kind of trader you’re determines the best time for you individually to trade, not the entire forex trading community. With so many currencies traded and the fact that they are in pairs, with each individual currency as we have seen having its own volatility determinants, the effects of which happening at different times, one would have to create their own unique strategy to suit their trading style. Every time frame is therefore important when it comes to forex trading as strategies are usually designed on the basis of timeframe to suit one’s style – whether short-term, swing, or long-term trading. Ideally, strategy creation should take into account price reaction in different timeframes, with higher timeframes acting as trend indicator charts and lower timeframes as trigger or entry charts.
This is usually done in the lower times frames between 1minute to the 1hour charts as traders look to take advantage of volatility to profit. Prices move faster in the intraday charts and traders see to profit from small changes in price. This means small targets with small gains at a time given that spreads are a major factor down there. However, it is one of the most complex approaches to trading in the forex market. It’s not the turf for newbie traders as one’s strategy has to come keep evolving very frequently.
Forex day traders have to re-invent their trading decisions continuously. If you are not accustomed to it, you will end up with huge losses as targets are usually smaller when spreads are factored in compared to the stops. This style of trading is very market-engaging with the trader. It demands a lot of screen time to see the opportunities as they come because they are frequent. They generally consider the 1hour time frame for direction and levels, then scale down to the lower timeframes to time their entries with precision. This means watching the screen without breaking to catch the early entry or you miss it. It can be an emotional rollercoaster.
Swing trading is a slower more calculated approach to trading. Swing trade will help you to scale down the time-frame as it is neither long-term nor short-term. As the traders can enjoy both worlds’ benefits, swing trading is one of the most popular approaches in the forex trading market. It requires a proper understanding of market structure and order flow. Markets are mainly approached from a technical aspect. Just like volatility plays a major role in the day traders decisions, price levels play a major role in the swing traders approach to trading. price takes a while before returning to certain levels which could be hours or, days or weeks at a time, so the frequency of trades is significantly lower than in day trading.
The main charts considered by swing traders are the monthly for levels as they are more significant in strength, the weekly for trend and direction, the daily for short term trends and setups, and the 4hour charts as trigger or entry charts. Some traders consider this slow as they don’t have the patience to sit and wait for setup to form or price to return to certain levels. The beauty with swing trading is that the trader may only need 15 to 30 minutes of trading every 24hour day. They mainly spend this time analyzing markets, identifying setups, and placing their orders. They then walk away from the markets and let the markets do their thing. They only return to manage their positions once every four or so hours.
This is more relative. Position trading is often mistaken for very long term position holding but it could also be short term. It depends on the position one is holding. The time frame ranges from a day to a year or years. Most retail traders consider this slow as they don’t have the patience to sit and let their positions run. Position traders are mainly trend traders and they seek to ride out trends. The levels from the high timeframes are more reliable. Traders will look at the long term and short terms trends from the monthly timeframes and wait for setups on the weekly timeframes. They can also scale down to the daily charts to time their entries
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