There is a common confusion between the forex market being open 24 hours a day and being active throughout the same time. While an upswing or a downswing better illustrates the situations when one can make or lose money, it is indeed difficult to trade in a range-bound market or rather when there is no movement in the market. There are four different forex trading sessions through any trading day, namely: the Australian session, the Asian session, the European session, and the U.S. session. The only thing you should know about Australian hours is that the market is very illiquid and trading is not recommended.
Asian session (Tokyo)
The Asian session starts at 12:00 AM GMT and is also known as the Tokyo session since Tokyo is one of the major financial centers in Asia. Among Asian countries, Japan holds the place for the third-largest trading center in the world. Echoing this, the Japanese Yen ranks third in the list of most traded currencies, accounting for around 16.50% of all forex transactions. Meanwhile, approximately 21% of all forex transactions through the day takes place during the Asian session.
Some key characteristics of the Tokyo/Asian session are as follows:
It is not only limited to the Japanese shores; a vast amount of trading is executed via Hong Kong, Singapore, and Sydney.
Primary participants during this session are the commercial companies and central banks. China and Japan are highly export-oriented economies, which makes currency trading an essential activity here.
The liquidity during this time of day can be very thin at times and traders might have to wait a long time before choosing a direction and opening any position.
This session is also characterized by higher demand in Asian currency pairs such as USD/JPY, AUD/USD, NZD/USD, etc., rather than non-Asian pairs like EUR/USD, EUR/GBP, USD/CAD, etc.
Since this is the first trading session of the day after illiquid Australia, movements in this session may guide markets for the rest of the day.
Most trading volumes are observed during the early hours of the session when major economic data is released, such as Australian Unemployment figures, RBA and RBNZ central bank meetings, Japanese CPI and Tankan Index, and Chinese data such as PMIs and GDP figures.
This session begins when Asian market participants are preparing to wrap up trading at 08:00 GMT. While the European market includes various trading centers across Europe, it is the London market that is the focus of major market participants. Also, owing to its strategic location, London has always served as a major trading hub. London is also considered as the forex capital of the world, with the most significant flow of trading volumes throughout this session. This session witnesses over 30% of total Forex transactions during the day.
Some key characteristics of the European session are as follows:
This session is characterized by high liquidity and lower transaction costs, i.e., lower spreads
The European session is also the most volatile trading session because of the vast number of trading volumes that it receives, and well as the publication of European and U.S. data.
Most trend movements across major currencies begin during this session and last until the New York session
That said, trends may also reverse, especially around the close of the London session at 05:00 PM GMT, as European traders head for the exits and book profits as the trading day comes to an end.
The U.S. session starts at 08:00 AM EST or 01:00 PM GMT just as European traders come back from their lunch breaks. Similarly to Asia and Europe, this session also has one major financial center, New York.
Some key characteristics of the U.S. session are as follows:
This session is usually highly liquid as it overlaps with London's trading volumes
Most economic releases are scheduled at the start of the New York session; about 85% of all trades involve the US Dollar (USD), and therefore, the for material market moves is present.
Once the London session shuts down, volatility slows down and liquidity dries up.
Which Pairs Should Be In Your Focus?
A huge amount of liquidity as well as volatility happens during the time when both the US as well as the European sessions are open at the same time. This overlap offers traders a wide range of currency pairs to be traded; however, it is advisable to stick to the majors and most common ones and avoid trading odd pairs. Also, since the US dollar will be involved in the majority of transactions, all attention will be concentrated to US data releases. Any data that comes in significantly below or above market expectations could shake markets and create big fluctuations in the greenback.