Market System: Trading the Forex 3-Session System

The post Market System: Trading the Forex 3-Session System by Jay and Julie Hawk appeared first on Benzinga. Visit Benzinga to get more great content like this.

Unlike many other financial marketplaces, the forex market stays open 24 hours a day throughout the trading week. Different world currency markets overlap as they open up at different times, allowing forex trading to continue uninterrupted from the market’s weekly opening until the following weekend arrives. 

Because of different forex session times, some currencies tend to have more liquidity than others during certain time frames. This factor can often affect the success of a forex trading strategy, and astute currency traders can use this phenomenon to increase their profit opportunities.

In this article, Benzinga explains the importance of time differentials between the major forex trading sessions. The forex 3-session market system is also discussed along with how savvy forex traders can profit from this knowledge.  

What is the Forex 3-Session System?

The forex 3-session system consists of the Asian-Pacific, European and North American trading sessions. These sessions generally correspond to the hours that the major financial centers operating in those regions remain open for business. The image below shows the trading hours of the three forex trading sessions, when they overlap and the approximate operation hours of the local markets in their component money center cities.

The image shows a rough guide to the usual forex trading hours for the 3 major trading sessions and the various major and minor money centers. Times are shown in GMT, ET and JT. Black rectangles indicate the “witching hour” between the New York close and Tokyo’s open. Source: “Forex Trading: A Beginner’s Guide” by Jay and Julie Hawk. 

Trading for the Asian-Pacific forex trading sessions begins each night at roughly 4 p.m. Eastern Time (ET) in Wellington and Auckland then Sydney. That session gets started in earnest once Tokyo opens around 7 p.m. ET, followed by Hong Kong and Singapore an hour later at 8 p.m ET. 

The European session then opens on the following day in Frankfurt and Paris at 3:00 a.m. ET, increasing in activity and volatility upon London’s opening at around 4 a.m. ET.  

The Asian-Pacific session continues to operate until around 5 a.m. ET., while the European session remains open until the London close between noon and 1 p.m. ET. Trading in Tokyo overlaps with the London session from 4 a.m. until 5 a.m. ET.  

The North American session then opens when the New York market begins trading at 9 a.m. ET. It overlaps with the European session for around 4 hours while London’s banks continue to trade. 

Trading in New York and Toronto continues until 5:00 p.m. ET when rollovers occur and Sydney opens once again. North American banks in Chicago stay open another hour, while those in the West Coast cities of  Los Angeles and San Francisco continue to make markets for another 3 hours. 

How the 24-Hour Forex Market Works

The local forex markets operating in major money centers around the world open and close at different times across different time zones as the trading day progresses. This means the 24-hour forex trading day always has a major financial market open somewhere during its typical market hours that stretch from Sunday evening until Friday evening New York time. 

The 3-session market system refers to the three forex trading sessions that largely operate in the major financial centers of Tokyo, London and New York. These money center cities serve as the major hubs where currencies trade during the three forex market trading sessions. 

The forex market also operates to a lesser extent in smaller financial centers.  Within the Asian-Pacific region, these include Auckland and Wellington in New Zealand, Sydney in Australia, and Hong Kong and Singapore. Lesser European forex trading centers include Frankfurt and Paris, while smaller North American trading centers include Toronto, Chicago, San Francisco and Los Angeles. 

The forex trading week begins in New Zealand’s major cities of Auckland and Wellington when banks there open at around 4 p.m. ET on Sunday. Market liquidity then increases significantly when Sydney’s banks open roughly two hours later at around 6 p.m. ET.

After operating around the clock as the three trading sessions cycle each weekday, the forex market then mainly closes down at 5 p.m. New York time (ET) on Friday, although some minor forex trading activity can persist until market-making banks based in San Francisco and Los Angeles close down for the weekend. 

New Zealand and Sydney also begin each daily trading cycle, while the New York session concludes the daily cycle. The New York close also marks the point at which daily rollovers occur. A trading position held beyond 5 p.m. New York time will either cost you interest if you are short the higher interest rate currency in a currency pair or you will get credited with interest if you are long the higher interest rate currency. 

Because of the existence of the three trading sessions, you can usually trade the forex market continuously in liquid trading conditions from around 5 p.m. on Sunday until Friday at 5 p.m. New York time (ET). While no sane trader would attempt to trade without a break during the forex trading week, you could code and operate a forex trading robot to profit from trading opportunities that can arise during the time you’re away from the market. 

Trading the Forex 3-Session System

Since some regions favor trading in certain currency pairs over others because of the existence of local transaction interest in those pairs, the corresponding forex trading sessions typically provide better pricing and see more volatility in those pairs. For example, the AUD/USD and USD/JPY pairs tend to be more active during the Asian-Pacific forex session than during the European and North American sessions. 

Below you can find descriptions of the three major forex trading sessions along with information about which ones might make the best choice for profitable forex trades.  

Asian-Pacific Forex Session (Sydney, Tokyo, etc.)

The forex market’s Asian-Pacific session opens somewhat tentatively in the South Pacific at around 4 p.m. ET in Auckland and Wellington but it then builds liquidity considerably once the Sydney market opens at  6 p.m. ET. 

The Asian-Pacific session then sees Hong Kong and Singapore open at around 8 p.m. ET, followed by Tokyo, which then dominates the session until it concludes at the Tokyo close around 5 a.m. ET. 

The Asian-Pacific forex session often displays the thinnest transaction volumes and the widest dealing spreads on otherwise liquid currency pairs that can react violently to unexpected news and macroeconomic data that deviates substantially from the market consensus. 

While these challenging trading conditions may not be optimal for inexperienced and novice traders, some seasoned forex traders have learned to take advantage of them. 

European Forex Session (London, Frankfurt and Paris)

For those interested in trading forex during European hours, the European forex session starts when banks based in Frankfurt and Paris open on the Continent at roughly 2 a.m. ET. The forex London session time frame then begins an hour later at around 3 a.m. ET. 

The European session closes between noon and 1 p.m. ET when London’s banks shut down for the day. This major trading session has special importance because it overlaps with the Tokyo session that closes around 5 a.m. ET and with the New York session that opens at around 9 a.m. ET.  

Once London opens, the European session tends to have the most liquidity and favorable trading conditions for most short-term forex traders. Also, major currency pairs like EUR/USD, GBP/USD and CHF/USD and major crosses like EUR/GBP and EUR/CHF tend to trade most actively during this session, especially since key economic data for the U.K. and the Eurozone is usually released early in the European session. 

North American Forex Session (New York, Toronto, Chicago, etc.)

The North American session starts to operate fully at 9 a.m. ET as banks open in New York and Toronto and while the high-volume London session is in full swing. Having market-making banks situated in the two largest financial money centers in the world open for business at the same time results in excellent forex market liquidity and generally very tight dealing spreads. 

Also, this session sees the release of virtually all U.S. macroeconomic news that can significantly affect most exchange rates since the U.S. dollar dominates the forex market. Currency pairs that include the U.S. dollar, including all of the major currency pairs, tend to see considerable volatility after the release of U.S. economic data. 

This data typically comes out at the beginning of the New York trading session so that can be a great time to use a news trading strategy or other short-term strategies that take advantage of substantial market volatility. 

After the London market closes between noon and 1 p.m. ET, market liquidity typically contracts into the New York close at 5 p.m. ET. Also, dealing spreads in the late North American session can widen at U.S. banks based in Chicago, Los Angeles and San Francisco since fewer participants are active in the market because the New York banks have stopped quoting and Tokyo has not yet opened. 

These effects are usually magnified on Friday afternoon as traders in Europe exit the market while Asia is already closed for the weekend. For this reason, trading forex on Friday afternoon during the New York session may not be optimal for making profits as a short-term trader, although those using a long-term trading strategy could see the level they were looking for trade during this time. 

A notable time frame to avoid operating in occurs for an hour after the New York session closes at 5:00 p.m. ET. Sometimes known as the “witching hour,” this time period lasts until the liquid Tokyo market opens at 6:00 p.m. ET. 

Since only secondary market-makers situated in Chicago, Toronto, San Francisco, Los Angeles, Auckland, Wellington and Sydney make markets during the witching hour, this time period is characterized by unusually wide dealing spreads and a general lack of liquidity that can make it especially challenging to trade.  

Forex 3-Session System Example

If you’re considering taking trading sessions into account when trading currencies, then you will first need to figure out if your strategy works best in a high-volatility or low-volatility environment. 

Most short-term traders like scalpers, news traders and day traders will tend to benefit from the high liquidity and greater market swings seen during the periods when two of the three forex trading sessions overlap. Economic data release times can also offer profitable trading opportunities for short-term traders. 

As an example, consider a short-term forex trader who wants to operate primarily in the GBP/USD pair. They will tend to find that the London/New York session crossover period will usually provide the most market movement they can profit from. Alternatively, if a U.S.-based trader wants to operate in the most active trading hours for GBP/JPY, then they will need to wake up early in the morning to watch that pair’s typically greater moves seen during the overlap between the Tokyo- and London-based forex markets. 

In contrast, those forex traders using longer-term trend trading strategies or fundamental analysis to inform their trading activities can instead benefit from just looking for the best exchange rate to enter or exit a position at. Market volatility can distract such traders from their objective, so they tend not to see much improvement in performance by choosing a particular trading session to operate in. 

Keep in mind that your physiological requirement for sleep could lead to judgment errors or exhaustion if you do not get enough because you are trying to trade in multiple sessions. The need to sleep can also prevent you from trading actively during all forex trading sessions or from trading during the session or session overlap period that would be best for a particular currency pair. You might do better by selecting a currency pair that would have ideal forex trading conditions for your strategy during your local time zone. 

Another approach that can help you participate in all three forex trading sessions involves using a forex trading robot to automate your trading strategy. You would first need to specify and code your trading signals into the robot and then set the robot running so that it trades automatically for you. The advantage of using a trading robot is that the robot does not need to eat or sleep, so it can operate actively during all three forex trading sessions. 

Which Forex Session Should You Choose?

The best forex session for you will partly depend on your location since many traders prefer to operate during the usual business hours in their time zone. This practice allows them to remain alert while trading, as well as to participate in social activities and enjoy a regular sleep cycle. 

Another factor that can help determine the best session for you to operate in is the specific currency pair or pairs you plan on trading. The major pairs all display varying degrees of liquidity and volatility in the different forex trading sessions.

Furthermore, if higher liquidity and greater volatility tend to boost your trading strategy’s returns, then you will generally want to select a time frame when the home money centers for the two currencies in a particular pair overlap. 

As a case in point, GBP/USD traders using a scalping strategy might do best when trading during the highly liquid overlap between the European and North American trading sessions since more banks make markets in that pair then. Also, most market swings for that pair tend to occur during this highly-liquid time frame in part because of the release of key U.S. economic data that can spark considerable volatility.

Keep in mind that some fundamental and long-term forex strategies like trend trading do not benefit as much from improvements in market characteristics like liquidity and volatility. If you intend to use such a strategy, then timing your entry and exit points well can override any trading session considerations. 

Frequently Asked Questions

The post Market System: Trading the Forex 3-Session System by Jay and Julie Hawk appeared first on Benzinga. Visit Benzinga to get more great content like this.