Knowing When to Trade -

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Knowing When to Trade -

Postby noushina » Tue Jul 06, 2010 2:57 pm

I think this is a keeper. Text and link follow. Graphics included in original link. ... trade.aspx

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.
Kathy Lien
Director of Currency Research, GFT
Last Updated: 10 min ago

In life, timing is everything and in forex trading, knowing when to trade is just as important as knowing what to trade. One of the greatest benefits of the forex market is that it is open 24 hours a day, 5 days a week. The ability to trade whenever you want can be a great advantage as long as traders realize that certain times of day are more suitable for trading than others. In order to devise an effective and time-efficient trading strategy, it is important to be aware of how much market activity occurs during different times in order to maximize the number of trading opportunities during those market hours.

On this relatively quiet Monday, U.S. markets are closed in observation of the July 4 th holiday and so we want to take this opportunity to tackle one of the most difficult challenges in the forex market - knowing when to trade.

Even though there is no official open and close in the forex market during the week, it can be broken up into 3 major trading sessions ? Tokyo, London and NY. The Tokyo trading session is the first to open, followed by London and NY. Below is a table of the unofficial open and closes for each session.

Asian Session (Tokyo): 00:00 ? 9:00 GMT

European Session (London): 7:00 ? 17:00 GMT

U.S. Session (New York): 13:00-22:00 GMT

When to Trade Based Upon Your Volume and Activity

The best time to trade is when markets or trading sessions overlap because there are more participants, which means more volume and momentum to fuel trends and breakouts. This also tends to be when economic data is released, providing the triggers for the movements in currencies.

European and U.S. Overlap: 13:00 ? 17:00 GMT

The forex market is the most active when the world?s two largest trading centers overlap. Approximately 70 percent of the total average range that a currency pair fluctuates in usually occurs during the European trading hours and 80 percent of the total average range of trading usually occurs during U.S. Trading hours. Just these percentages alone tell day traders that if they cannot sit at the screen all day, the best time to trade is the U.S. and European overlap which is between 13:00 and 17:00 GMT.

Asian and European Overlap: 7:00?9:00 GMT

The next best time period to trade is during the Tokyo and European Session overlap when both Asian and European traders have the opportunity to respond to European economic data. The London open can also be particularly volatile as European traders react to overnight developments.

When to Trade Based Upon Your Trading Style

The optimal time to trade can also depend upon the trading style. For example, momentum, trends and breakout trading strategies usually work better during active and liquid market hours while range trading usually works best during ?off hours.?

? Range trading ? For forex traders that like to buy trade ranges during the course of the day, the best time to trade is usually between different trading sessions, a hour or so before economic data is released or the lull before the market closes.

? Momentum and Trend trading ? The best time to trade momentum and trend is usually after economic data is released because if the surprise is large enough we could see follow through for at least a few hours.

? Breakout trading ? The best time to trade breakouts is usually right when the trading session opens and when economic data is released.

In the following table, I annualized 1 year worth of hourly data for each of the major currency pairs to determine what time of day tends to be the least and most volatile. In the AUD/USD for example, the trading range tends the be the widest, which suggests that the chance of a breakout is the greatest between 14:00 and 16:00 GMT, right between the London and NY trading session. The best time to range trade the AUD/USD is between 3:00-5:00 GMT, a few hours before the London open.

At the end of the day, the best time to trade is really dependent upon your trading style and schedule. If you like to range trade, you can trade during working hours in Sydney. If you can only trade after work, then you may want to look for breakouts near the open of the London trading session and if you are night owl, you can trade the overlap between the London and NY session. The key is not mix and match or to try to trade range when the chance the breakout and wild swings are the greatest.

The times of the year can also matter. Volatility in the forex market tends to settle during the summer and pick up during the fall and winter as we near the fiscal year end. Therefore range trading may be more appropriate during June and July while trend trading may be more appropriate between October and January. The following charts have been created using option volatilities.

[excluded 3 images found at original site showing volatility highest in dec and lowest around June for EU, GU, EJ]

Finally, not all currencies are created equal. Some currencies are more volatile than others on an intraday basis. This does not mean that they are not appropriate for range trading but rather that when trading the more volatile pairs, wider stops may be needed. In other words, a 30 to 40 pip stop may be significant in EUR/CHF but very insignificant for a currency pair like GBP/JPY.

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