What time of day do TV ratings peak? You would be correct if you said during prime time!
What relevance does this have to trading sessions?
Just as on TV, “ratings” (a.k.a. liquidity) are highest when more people participate in the markets. So, when is it better to trade forex?
Logically, this should occur during the overlap between the two sessions.
You’d only be half right if you thought that.
To understand why, consider some of the characteristics of the two overlap sessions.
Tokyo-London Overlap
For a variety of factors, liquidity is quite low during this session. Typically, there isn’t as much activity during the Asian session, so as the afternoon arrives, it’s a snooze fest. Trading can be tedious as liquidity dries up with European traders just getting into their desks.
This is an excellent opportunity to relax, play putt-putt golf, or explore for potential trades for the London and New York sessions.
London-NewYork Overlap
According to the most recent statistics from FXLIQUIDITY, an FX market analytics firm, liquidity is at its peak between 10 a.m. and 3 p.m. London time (10 am NY time).
This is when the real party starts! Traders can literally be heard cracking their knuckles during this period since they know they have a lot of work ahead of them. This is the busiest period of the day, with traders from the world’s two main financial centers (London and New York) competing.
This is the time to expect major changes, especially when news from the United States and Canada is announced.
Markets can also be impacted by “late” news from Europe.
If any patterns emerged during the European session, we may see them persist as U.S. traders decide to step in and take positions after reading up on what transpired earlier in the day.
Finally, it is critical to understand that the WM/Refinitiv Spot Benchmark Rate is calculated throughout this time period. The rate is fixed at 4 p.m. London time is referred to as the “London fix.” A currency “fixing” is a set time each day when currency prices for business transactions are set, or fixed.
Because currency prices fluctuate by the second, a daily “reference point” is required. This daily rate is used by banks and other financial organizations to set their currency exchange rates, which in turn affect the prices used in corporate foreign exchange transactions. From a trading standpoint, this daily fix may witness a frenzy of activity in the market prior to the fixing time (usually 15 to 30 minutes) that abruptly fades at the fixing time.
Finally, some European traders may be closing their positions as their day comes to a conclusion, which could result in some choppy moves just before midday in the United States. A daily “reference point” is required. This daily rate is used by banks and other financial organizations to set their currency exchange rates, which in turn affect the prices used in corporate foreign exchange transactions.
Next Lesson: Best Days of The Week to Trade Forex
