Understanding Liquidity in the 24 Hour Forex Market

The foreign exchange market is unique among financial markets in the sense that it does not open and close each day. The fx market opens on Sunday evening around 5 pm est and it stays open 24 hours a day until Friday afternoon around 5 pm est. In this article, we are going to break down the 24 hour trading period into smaller periods in order to understand better how to trade this market.

First of all, many people will argue that there are “bad” times to trade the fx market. That is simply not true. Every second of every day can be a “good” time to trade the fx market. Here is the key—a trader must employ the right strategy during the correct market hours.

For example, it is not wise to trade a momentum-based breakout strategy at 4 pm est. Neither is it wise to trade a range scalping strategy at 3 am est during the London Open. Remember, it is of paramount importance that each type of strategy be used with the proper market conditions. Similar to the notion of dealing with usda eligibility and the conditions that enable you to get most out of your investment. Let’s break down the 24 Hour Period. All times are eastern standard.

4-7 pm

NY markets close at 4 pm. Liquidity falls during this time period as there are no active markets open. The U.S. markets are now closed for the day, European markets have been closed for hours, and Asian markets are not yet open. This often leads to very tight trading ranges and very low volatility.

7 pm – 10 pm

Asian markets open around 7 pm and there is generally a strong spike in volatility and increased liquidity between 7-8 pm each night. By 10 pm each night, Asian traders tend to bring price into a sideways market in anticipation of the European markets that will be opening in a few hours.

10 pm – 2 am

This is one of the quietest times of the day. Asian traders are largely waiting for European liquidity. This time period is characterized by very low volatility.

2 am – 5 am

This is considered by many traders to be the best time of day for breakout trading. Frankfurt opens at 2 am and London opens at 3 am. Euro-based pairs such as EUR CHF are quite active during this time period.

5 am – 8 am

European traders typically back off and let price deal into a sideways market during this time period as they wait for the U.S. markets to open.

8 am – 12 pm

This is the most liquid time of the day and great for breakouts. The NY and London markets are both open simultaneously.

12 pm -3 pm

The afternoon U.S. market is less liquid than the morning since European markets are now closed. After a brief lull during lunchtime, the afternoon U.S. markets typically show strong movement.

Thus, the fx market is characterized by liquidity flows from region of the world to region of the world. As a trader, make sure that you are using your strategy during the most proper time of day for its objectives.

Risk Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.

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