The Foreign Exchange Market is the largest financial marketplace in the world. There is no central location where all forex orders pass through. For example, if you are trading a stock that is listed on the New York Stock Exchange, then the order to buy or sell that stock is eventually passing through a floor broker at the New York Stock Exchange on Wall Street. The forex market, however, is different. There is no central clearinghouse through which all trades pass.
Instead, the forex market is a decentralized market that is made up of an informal and loosely-connected network of large banking institutions. Therefore, instead of a floor broker, your trade order is eventually reaching one of two places: either your broker’s desk if they are running a dealing desk or a liquidity provider, which is usually a large banking institution such as Morgan Stanley. Foreign exchange trading liquidity then flows throughout the day from one financial center in the world to the next as these different banking institutions open and close for business each day. Its not like the normal banks with regular hours that help people with personal accounts and something such as usda loans.
A 24 Hour Market
AsiaThe market opens with the New Zeland Open. Australian markets open soon after and at 8:00 pm, Tokyo opens for business. Tokyo is the 3rd largest financial center in the world behind New York and London, so liquidity and price movement will generally spike strongly at 8:00 pm.
The Asian breakout that usually occurs right around 8:00 pm generally results in decent price action until around 10:00 – 11:00 pm each night. At that time, Asian traders begin to scale back positions and wait for the European traders to bring in the next round of liquidity. Thus, the market will generally stay very quiet between 10:00 pm and 1:00 am.
Europe
At 1:00 am Eastern European traders bring in another depth of liquidity to the market, and strong price movements can be seen between 1:00 am and 2:00 am. At 2:00 am, the Frankfurt market opens, and Europe begins rolling. Then, at 3:00 am, London opens and Europe is in full swing. London is the largest financial center in the world, and more trading volume more passes through London each day than any other financial center in the world, New York included.
European traders stay quite busy until about 4:30 to 5:00 am. Around that time, traders will take a break and wait for U.S. liquidity to come into the market. The market generally quiets down between 5:00 am and 8:00 am each day, as traders anticipate the New York Open. At 8:00 am, New York markets open, and another rush of liquidity comes into the market.
New York
This overlap between 8:00 am to 11:00 am is considered by many to be the best time of day to trade because both the London and U.S. markets are open. Liquidity is very deep, and this can lead to strong price movements. Around 11:00 am, London markets begin to close and the market will generally get quiet around 12:00 pm. Then, around 1:00 pm each day, there is usually one final push of price movement as U.S. traders take positions into the end of the day. Finally at 3:00 pm, the market quiets down again, and it generally remains quiet until Asian liquidity comes back into the market around 7:00-8:00 pm.
By understanding time of day, a trader can greatly increase the probability of his trading system. Every time of day in the fx market is a good time to trade; however, a trader must match the proper strategy with the proper time of day. For example, one should not trade a strong momentum-based strategy with a forex account at 4:00 pm, nor should one trade a range-bound scalping strategy at 9:00 am.
Always make sure to match trading strategy with time of day to create the perfect combination.
