This Wiki is a part of our Essential Forex Trading Guide. Be sure to check that out HERE.
Forex Trading Session
Now that you have an overview of the Forex trading hours, it’s time to take a look at the individual trading sessions. In this Wiki, we are going to take a deeper look at the various trading session and discover all about their personalities and characteristics.
Asia Pacific Session
Overview of the Asia-Pacific Session
The Asian session kicks off the start of the trading week for the entire world every Sunday at 5pm EST or 10pm GMT. This is the reason that we have chosen to talk about it first rather than the other sessions.
The Tokyo session is commonly referred to as the Asian session. Traders call it the Tokyo session because Japan is the largest financial center of the Asia’s and is currently the third largest Forex trading center in the world.
However, trading is not limited to the Japanese currency alone. Many other markets are open for business during this session time frame such as Hong Kong, Singapore, New Zealand, and Sydney Australia to name a few.
The Tokyo and Sydney sessions tend to get lumped together as the same thing and are generically referred to as the Asian session. If we are talking about the Asian session then you should assume that we are including Tokyo and Sydney as the same thing unless stated otherwise. This session is also sometimes referred to as the Asia-Pacific session.
The liquidity can be quite thin at certain times. This is especially true when there is no economic data expected to hit in the Asian session. When news flows are light and there is no real sentiment driving prices then there can be quite a bit of random noise to be cautious of.
In a typical market environment, the average ranges for each currency pair tend to be much less than in the other two sessions. So just because you see that the EURUSD has moved 100 pips in the U.S. session this does not mean that it will do the same in the Asian session. It will likely move much less in the Asian session.
Corporate Currency Demand
What makes the Asian session a particularly interesting trading session is that the various market participants are trading in a completely different way to those who are trading in London and U.S. sessions. In Asia, there is a lot of large corporate and central bank currency demand flowing through the Forex market because nations such as Japan are huge exporting countries. This means that a large amount of the trading is based on corporate demand.
If you think about it, companies that need to exchange their local currency for another have no incentive to try and drive prices in one direction or another. They simply want to execute transactions in the most efficient manner possible. This means that they have an active role in not pushing prices around too much or it could hurt their bottom line. This makes price action much less volatile on average.
A large amount of corporate demand typically means that there is a lot of exchanging currencies to do business with other countries. For example, if you are a Japanese company and you want to do business with a company in the U.S. then you need to sell your Yen in order to buy U.S. Dollars so that you can do trade with the U.S. company. This is a totally different function than the pure speculation that we are used to in the other session. This results in price action which is much different and calmer when compared to the other two major sessions.
The main market participants during the Tokyo session tend to be traders acting on behalf of commercial companies such as exporters because Japan, and most other Asia-Pacific countries, their economies are heavily dependent on exporting goods to other countries.
China and central banks are also key players in the Asian session because they need to adjust their currency reserves or make international payments in foreign currencies on a regular basis. These adjustments and purchases can get very large and have a potential impact on currency prices.
Speculation in the Asia-Pacific Session
During the Asian session, prices tend to move in a much more subdued manner with lower price ranges and fewer instances of volatile price action when compared to the other major trading sessions. However, this does not mean that large moves don’t happen in the Asian session, because they do on a fairly regular basis. But it is important to understand the nature of any market time before you attempt to trade it.
For the most part, any speculation that does occur in the Asian session will probably happen around high-impact economic data releases. These economic data sets tend to happen at the start of the session in the same way they do in both London and New York sessions.
There are also data releases from Australia and New Zealand during the Asian session which can cause large moves on those particular currencies. So, the major currencies to focus on in the Asian session are the Japanese Yen, Australian Dollar, and the New Zealand Dollar. Trading is more precise when done only in pairs that have these currencies in them providing the most trading opportunities throughout the Asian session.
There are times when the moves in the Tokyo session can set the tone of the market for the rest of the trading day including the London and New York sessions. This is only if there was some major news or economic data such as a central bank interest rate change. The point is that the news needs to be very high impact. Traders in later sessions will look at what happened during the Tokyo session to help develop a bias for their trading day and could decide to trade in line with the sentiment.
Momentum from Asia into London
Another interesting observation of the Asian session is that any large price moves that happen are often carried over into the London session. This is because London traders are sleeping when the Asian session is in full force. When the London traders get to their desks and see that there has been a nice price move, for whatever reason, the potential is high that they will want to get in on the action and make some pips as well.
This is when knowing the average daily range of a currency pair is going to help you out. For example, if you see that the price of AUDUSD has moved up 50 pips on positive [[Economic_data_releases | news] from Australia in the Asian session, but the average 24-hour range is 100 pips, then you know there are still potentially 50 pips to go. And if this is really positive news then of course London traders are going to want to buy up the AUD when they learn what happened when they were sleeping.
However, if price has already burned up the average daily range in the Asian and London sessions then it will make continuing that move much more difficult in the New York session. This is simply because there needs to be a pullback of profit taking at some point. Once you have used up the average daily range that is typically a good spot for that profit taking to potentially happen.
All of this highlights why part of your daily research should always include reading the overnight news and analyzing any significant data that was released. Doing so will help you understand what the driving reasons are behind the price action going into the London session. This of course assumes that you are going to be trading in the London session.
Momentum from New York into Asia
A fairly common occurrence happens when there is a really large positive or negative price move in the New York session that stays relatively close to the high or low of the move. When a currency pair has become really extended in the New York session it’s typical to see price consolidate near the high or low in the Tokyo session.
This happens because there is no reason to reverse the move because there was a lot of power behind it. There is also not as much power in the Asian session to push prices in the opposite direction because there is a lot less speculation in the Asian session than in the New York session. So price remains in a drift or a consolidation pattern throughout the Asian session.
Sometimes London session traders will look to create or trade [Breakouts_and_Breakdowns | breakouts] of this consolidation from the Tokyo session. This is something we call the Tokyo Drift trade. The basic idea of the trade setup is you get a big move in the U.S. session, then price consolidates in the Asian Session, and you look to trade in line with the [[Breakouts_and_Breakdowns | breakout] sometime just before the London session kicks off.
This is of course as long as nothing in the sentiment has changed since the U.S. session. The key to this setup is that the sentiment is so strong that you should be looking to continue the price move when the speculators show up in the London session. If the sentiment has changed or new information has hit the market to negate the sentiment then it doesn’t matter what the pattern looks like, the trade will likely fail.
The China Effect
Chinese news and economic data tends to have an impact on the currencies that belongs to countries that China does a lot of trade with. One currency that can be particularly sensitive to Chinese economic data is the Australian Dollar.
China is a huge trading partner and buys a lot of natural resources from Australia. Economic data that affects how much natural resources China will buy can have a large positive or negative effect on the Australian Dollar.
For example, if China releases data that suggests there could potentially be fewer purchases of raw materials then this means that Australian mining companies will be selling less of their raw materials to China. If they are selling less then they are making less money. If they are making less money then they are paying less taxes to the government. If these companies are paying less taxes then this negatively affects the GDP data of Australia which is obviously bad for the currency. This is one reason Chinese data can impact the Australian Dollar.
The London Session
Now we that know all about how the Asian session works and how price action unfolds, it’s time to follow along chronologically and explore the following session. The London session is what we will jump into in this now.
Overview of the London Session
When the Asian session is starting to close up shop for the day, the British and European traders have just had their tea or espressos and are getting to work at their trading desks.
There are several financial centers in Europe including Germany, France, Italy and Spain to name a few. However, London is by far the main hub when it comes to the Forex market. The London session is also commonly referred to as the European session. Traders tend to group things together and refer to them generically.
The largest and most active session is by far the London session. This session opens at 8 am and winds down by 5 pm London time (GMT). These times are based on the London stock market opening times. The reality is that currencies continue to move both before and after these hours. The reason we adhere to these hours is because this is when most professional city traders are actively trading at their trading terminals. This means that we retail traders will want to be actively looking for trading opportunities in these times as well.
It’s ok if you can’t trade during these hours because there are definitely lots of other opportunities but the London session is the session that typically has the most excellent trading opportunities each week. There also tends to be more follow-through because of the higher levels of liquidity.
Because a large portion of the total daily transactions take place in the London session this creates an environment of tighter spreads. Having tighter spreads makes the cost of trading and doing business lower which is always a good thing for us retail traders and to the big fund traders.
The Center of the Forex Universe
London has been referred to as the center of the Forex trading universe. This is actually a pretty accurate statement.
New York and Tokyo are massive financial centers but for different reasons than London. It is estimated that between 60% and 70% of all spot FX transactions occur during the London session. This dwarfs both the New York and Asian sessions combined.
Historically, London has been a major center for trade because it has a strategic geographic location that is able to do business with a large number of other major financial centers. A lot of this competitive advantage has to do with the time zone that London is in. London is simply able to do the most business with other countries that are awake when it is.
London is able to do business with roughly 90% of the world’s largest financial centers which is not something that most other countries can say. Nor would most other countries have the infrastructure and the capability to pull off dealing with so many different financial centers. This also makes the United Kingdom a rather multicultural nation as businesses set up shop there from all over the world.
Speculation in the London Session
The nature of the London session is very heavily based on speculative trading. This is because of a few reasons such as a high number of market participants which causes high levels of liquidity. Also, major data is released from all over Europe and the U.S. at the open and in the middle of the London session adding to the number of speculators looking to capitalize on potential price volatility created by high impact events.
For the reasons just mentioned, this means that trends tend to start and run during London hours. This is not a 100% guaranteed statement but it has been our experience that it is easier to get in on some nice clean price moves than in the other trading sessions.
Momentum from London into New York
The London session overlaps with the New York session which tends to kick off around 1 pm London time or 8 am EST. Of course, you need to account for daylight savings time when that happens because there will be a 4 hour difference instead of 5 hours.
This overlap with the New York session means that the second half of the London session can be full of action as it contains, not only the vast majority of the London and European based traders, but also the influx of U.S. based traders joining in on the action.
When the New York session kicks off there could be some U.S. economic data that might support and add fuel to the ongoing trend that London started. Of course, the opposite could be true as well because the new data could interrupt or negate the preceding trend depending on if the news supports the trend from the London session or not.
Because the London session crosses over with the New York session this has the effect of creating a huge amount of liquidity which traders and financial institutions need to trade and do business effectively. Volume and liquidity always has the potential to create or ignite momentum if there is a reason for that directional momentum.
London Session Volatility
Due to the large amount of trading activity, the London session is typically the most volatile with the largest price swings. This is definitely a time when traders have plenty of opportunity to find good trades. Speculators love volatility because it helps price move more. It also creates an environment of excellent liquidity.
Most powerful trends will begin in the London session and typically carry on into the New York session as long as the sentiment reason for the original move is maintained. If the trend started in the Asian session it will tend to finish in the London session.
Volatility tends to calm down in the middle of the London session because traders head off to lunch. This is a good time to get lunch because the New York traders are just starting to drink their coffees and not quite ready to start trading. When the London traders get back from lunch they now have the New York traders at their desks ready to help them push the pricing structure of currencies.
Strong trends can reverse sharply near the end of the London session because London and European traders might decide to lock in profits. If price has run in one direction for a while it is only natural to assume that profit taking will come into play soon. Profit taking means that the price will reverse because if the trend was up then you need to sell to book profits. If the trend was down then you need to buy back your shorts to book profits.
These reversals can also be a common thing to see on Friday’s because a lot of London traders will want to square up their positions or get flat going into the weekend. This is especially something to watch out for on days where we have had larger than normal price ranges.
These sharp reversals can sometimes set up counter trend trades for very skilled traders who are able to handle reversal trading. The funny thing about reversal trading is that most retail traders try and start with picking highs and lows for reversals but the reality is reversal trading is one of the hardest things to do as a trader. If you are a not a consistently profitable trader then you are probably better trying to trade with the established sentiment that we have spent a huge amount of time explaining to you in this guide.
The New York Session
You are now clued up on the kind of trading activity that takes place in the first two trading session of the each day. Now it’s time to fill in the last piece of the puzzle and learn all about the New York session and what makes it different from the other sessions.
Overview of the New York Session
Just as the European traders are coming back from their lunch break, the U.S. based traders have their morning coffees in hand and are starting to arrive at their desks.
This is the point where the U.S. traders are taking a look to see what has happened overnight. They start developing their trading biases for the day ahead of them based on the news, economic data, and price action that has taken place while they were sleeping. This is them doing their morning research and analysis just like you have been taught to do throughout this guide.
New York is the largest financial center in the United States in terms of foreign exchange. There are other major financial centers such as Chicago that do a lot of futures and commodity trading but they do not compare to New York when it comes to the size and volume of currency transactions.
The New York session is commonly referred to as the U.S. session or American session.
The New York session is based on the opening and closing hours of the New York Stock Exchange which is 9:30am until 4pm New York Time. Despite the fact that the New York Stock Exchange is open from 9:30am until 4pm, the New York Trading session is active from around 8am until 5pm New York time, and sometimes earlier if there is something important happening that is forcing traders to work overtime.
Early Morning Speculation in the New York Session
The liquidity is absolutely massive in the early morning of the New York session. This is because the New York session overlaps with the London session during this time. Having this situation where the London and European traders combined with the fresh and ready to go U.S. traders makes for a lot of speculative activity during this time. And we know that speculation drives up liquidity, reduces spreads, and increase price movements for us to trade within.
The early U.S. session is definitely one of the times where we should be paying attention to the Forex market if want to find high probability trades that have a solid potential to move for us. This is especially true when there have been major price moves that have kicked off in the London session. These major price moves tend to continue along until some new sentiment or profit taking comes into the market to slow it down.
Most North American economic data sets are released near the start of the New York session. Economic reports and data are one of the main reasons that speculation is so strong during the early New York trading hours. This is very convenient for the London and European traders as well because they are still active in this time.
Think about how great London and European traders have it for a second. They get to trade their own high impact economic data and market moving events PLUS they get to trade all the same in the U.S. session. They literally get to trade almost all the best price action during the entire 24 hour day but it all happens their regular working hours. More reason to live and trade in London or Europe!
Given that roughly 85% of all trades in the foreign exchange market involve the U.S. Dollar (this obviously changes over time), any important economic data out of the U.S. has the potential to move the Forex market in a big way. There are simply a huge amount of eyes watching the news flows and price action during this time.
Afternoon Speculation in the New York Session
Once the European markets close down for the day, liquidity and volatility tends to slow down within the New York session. London and Europe close up shop between 4pm and 5pm GMT. This means around 11am to 12pm EST a lot of market participants pack up and head home or off to the pub. This is a lot of liquidity being removed from the market at one time.
Because a large percentage of the liquidity has been removed from the market this means that there can be pullbacks against the dominating trend of the day. If you think about it this makes complete sense because there are simply less traders in the market to continue the price in the preceding direction. Plus you have the added pressure of any profit taking that may have taken place as the European traders close down for the day.
However, if there is some very significant event that is dominating the market then price may continue to be volatile regardless of the time of day. If there is something that is driving a lot of fear or concern into the market then the London and European traders may have to put in some overtime to make sure their positions are managed properly. This extra volatility may add some more profitable trading opportunities as well.
It’s not always the case that all afternoons are slow in the U.S. session because of lack of economic data to push prices. FOMC data typically comes out at 2pm EST. This is typically an event that will cause a lot of volatility and may force the London traders to put in some overtime. FOMC releases can have a huge impact on price action for sustained periods of time if the data is particularly important to the market at that time. This is always something to keep an eye on for sure.
The Friday Effect
Typically, Friday afternoon provides little price action or trading opportunities. Asia-Pacific market traders have already been off for the weekend for many hours and European traders have packed up and are off to the pub. This lowers the potential liquidity which may cause price movements to be less volatile or even become choppy. Under normal circumstances this is not a time where you should expect big price targets for your trades.
There is a potential for Friday to have sharp reversals away from whatever the dominating trend was for the day or even from the previous few days. This has to do with position management of the big traders.
Friday can be a shore up day where the big traders take risk off going into the weekend. If they were taking on long risk during the week then they may look to sell or hedge their risks going into the weekend which could be a cause for the reversal. This really all depends on the risk sentiment in the market at the time. If you are a rather skilled trader than you might be able to catch a few pips on these reversals when they happen.
However, sometimes Friday afternoons can provide some interesting movements if there is a major reason where traders need to position themselves over the weekend. Political instability or other geo-political events can cause this where many traders will want to reduce risk over the weekend and reposition themselves. Again, this all comes down to you understanding the current sentiment driving currency prices at the specific time.
Another thought is that Non-Farm Payrolls, Average Hourly Earnings, and the Unemployment Rate for the U.S. come out at 8:30am the first Friday of each month. This has historically been an event that has the potential to move prices of USD currency pairs a heck of a lot. If the numbers that come out are really positive, really negative, or miss expectations by a wide margin then Friday price action could rock and roll right into the close of trading for the week. This is where you knowledge of interpreting risk events will help you determine when this is likely to play out.