How Trading Sessions Influence Price Behaviour in the Markets
Richard Montana | September 12, 2022
When trading global financial assets online, it is not only important to determine WHAT and WHY to trade, but also WHEN to trade. Online financial markets are typically open round the clock during trading days, but depending on your investing goals and availability, it is important to understand the impact of forex sessions on your trading activity. The different trading sessions have distinctive characteristics, and this can influence your entire trading plan for trading various global financial assets online.
The 3-Session Forex Market
There are 3 major trading sessions every day: Asian, European, and North American. The Asian session is centred around Tokyo and features low trading volumes and liquidity. However, Asian stocks and major currencies such as the JPY, NZD, and AUD can be active during the Asian session. The Asian session begins in Sydney which opens at 2200hrs GMT, and it closes during the Tokyo close at 0800hrs GMT.
The European session is centred around London and features the highest trading volumes of all sessions. The most active assets are European and other selected global stocks, as well as currencies such as the USD, EUR, GBP, and CHF. This session is considered the traditional centre of the Forex market and has high liquidity almost throughout. The session opens at 0800hrs GMT and closes at 1600hrs GMT.
The North American session is centred around New York and features the second-highest trading volume. It is also characterized by high liquidity, with the US and other global stocks particularly very active, as well as currencies such as the USD, EUR, JPY, GBP and AUD. The New York session opens at 1300hrs GMT and closes at 2100hrs GMT.
It is important to note that countries that observe Daylight Savings (DST) will see some changes in the opening and closing times of their respective sessions during the months of March, April, October and November.
Best Time to Trade Online
When trading financial assets online, profits are generated out of price movement. The biggest activity occurs when trading sessions overlap, which implies more market participants. The biggest overlap is when both the London and New York sessions are open (1300hrs GMT – 1600hrs GMT). This time features the highest activity and represents the best time for short-term traders to take advantage of price changes in the market.
Your trading style as well as time availability can impact your trading decisions. For instance, if you are a risk-averse trader, you can trade the Asian session to avoid the danger of sudden price spikes in the market. As well, if you are only available during certain times in the day, you can decide on the best assets to trade during those times.
How Trading Sessions Influence Market Sentiment
Market participants tend to follow through on the cues provided in previous trading sessions. If a prevailing session closes on a particular sentiment (bullish or bearish), the succeeding session will tend to follow through on that sentiment. For instance, if during the European session stocks are trending higher and there is generally an appetite for risk in the market, expect the succeeding US session to follow through on that sentiment. This means that during the US open, stocks will tend to open higher and there will be an overall bullish sentiment on risk assets, such as exotic currencies.
Still, markets are dynamic, and this follow-through is not guaranteed. Some of the factors that can prevent the continuation of market sentiment include:
- News Releases
In every trading session, there are scheduled releases of important news events that can trigger new sentiments in the market. For instance, if the EURUSD currency pair is trending lower during the European session, but a major news event is released during the New York session that is negative for the USD, such as rising unemployment, sentiment on that currency pair can change and trigger the start of an uptrend. This is why many traders track news releases using the Economic Calendar. Nonetheless, whether positive or negative, the news is always subject to the interpretation of market participants. If negative news is bypassed (or deemed inconsequential) by market participants, the prior positive sentiment in the market will prevail.
- Technical Exhaustion
In any trading session, market participants tend to have price targets for the assets they are trading. When such targets are achieved, there may be bulk decision-making which can prove significant or impactful in the markets. For instance, if Tesla stock is very bullish and just crossed above $400, there may be a push for it to hit the $500 price handle. After a sharp rise to that price area, profit taking may trigger a correction that bears may also take advantage of to stage a mini price tumble in the market.
It is, therefore, important to track different trading sessions for cues about the potential price direction of global financial assets. News releases are some of the most influential catalysts of price changes in the market and depending on the type of asset you are trading; you can stay on top of trading opportunities in the market if you track them objectively. Psychological price points can also serve as important reference points for both short- and long-term traders that are seeking optimal price entry and exit points in the market.
Volatility is one of the most defining elements of any investment activity. It can influence both risk and reward in the markets, and even directly influence strategy application. Trading sessions are some of the major catalysts of volatility changes in the market. Understanding them can help you refine your trading strategies so as to better exploit opportunities in the market.