By Sean Hyman

Forex trading is a mystery to many retail investors simply because it doesn’t trade like your traditional stocks, bonds or commodities.

For starters, the Forex market doesn’t have any kind of physical exchange. Instead, all trading takes place on the computer screens of both institutional and retail Forex traders around the globe 24 hours a day, roughly five and a half days a week.

This means, there is no bell that rings to open trading like there is at the New York Stock Exchange (NYSE), so traders simply have to know when trading volume is high so they can successfully time their trades.

The Market With No Starting Bell

So what makes trading kick in then? Well, think of it this way. Currency trading is about exchanging money and the rate it can be exchanged.

Where is money most often exchanged? At banks.

Therefore, a currency’s highest trading volume often happens when that particular currency’s country has banks that are open for business. In other words, during banking hours.

This divides the Forex world predominately into three major trading sessions: The European session, the U.S. session and the Asian session.

You won’t find Forex traders in this pile-up

The absolute highest volume times are in the European session and in the early U.S. sessions. This is when the most “exchanging” goes on between these two countries out of any major economy in the world.

And I’m not just talking about Forex traders. Remember the currency market trades the one commodity everyone uses every day – money. So when banks are open, businesses around the world are making their own “donations” to the Forex market. Businesses are making various exchanges like making payroll, acquisitions, buying foreign products or equipment, etc. All this activity causes an influx of capital to the Forex market.

Where You’ll Find the Biggest Currency Traders in the World

Speculators also help created volume in the market. Every seasoned trader knows that the biggest groups of foreign currency traders are in the U.K. After that, the next biggest group is U.S. traders. So this makes these two sessions the most “trending” and volatile due to all of the above reasons.

So since there really is no “bell” that rings, when does the European session really kick off?

It gets fully cranked up by around 3 AM EST each morning. The U.S. session gets in full steam by about 8 AM EST.

Between 8 AM and 12 noon EST, both of these sessions are overlapping and causing enormous Forex volume. Also, at the same time, much of the U.S. economic data comes out between those times too. This produces a lot of volume and volatility too.

The European session really is all but gone after about 12 noon EST and the U.S. session winds down to a crawl around 5 PM EST. Then there’s extremely light volume until the Asian session gets in full swing at about 7 PM EST and it takes you through until about 2-3 am EST. Remember that the Asian session carries the lightest volumes and also tends to produce more ranges than trends.

Great Times for BOTH “Trend Traders” and “Range Traders” in Forex

So if you are a “trend trader” and you like movement, then you will likely want to trade sometime between 3 AM EST and 12 noon EST.

If you are a range bound trader, then you may want to trade after 5 PM EST and be done around 2 AM EST. But one thing’s for sure, this is a market that has something in it for everyone.

Oh, did I mention that even in the lower volume Asian session, the Forex market still has more volume than many stock markets around the world? In other words, a “light time” in the Forex market is still better than a high volume day in many stock markets.

So you won’t have to worry about the fills on your orders there either.

Obviously, it’s best to trade the currencies that have to do with their respective trading sessions too. In other words, you may not get much movement trading AUD/JPY in the European session when both Australia and Japan’s markets and banks are closed. It still trades, but the volume is much lighter than say EUR/USD, GBP/USD or EUR/GBP in the European session for instance.

The Dollar Pairs: Higher Volume, Lower Cost to Trade

Also, keep in mind that any major pair that has the U.S. dollar in it will have higher volumes generally than those pairs that aren’t paired with the dollar.

Why? Because, the U.S. dollar is the world’s reserve currency and therefore the most widely used currency in the world. Also, many goods of the world are priced in (and therefore purchased with) U.S. dollars. So AUD/JPY won’t carry quite as much volume as AUD/USD for instance.

However, this is no reason to ignore the AUD/JPY pair if a great trade presents itself. But it does help to explain why the spread between the buy and sell quotes are wider apart on the AUD/JPY than they are on the AUD/USD pair. You see, the higher the volume in a pair, generally the lower the spread there is and therefore the lower cost to you in trading the pair (since your trading cost is the spread).

I hope this has helped to “demystify” the mystery of how currencies trade around the clock all around the world.

Best Regards,
Sean