In the webinar a couple weeks ago a question came up from one of the attendees as to when the best time of day is to trade. This is a question that comes up a lot among forex day traders, though obviously most folks who seek to operate in that arena are constrained by the time zone in which they live. I’m going to present two distinctly different answers to the question – ones that contradict each other.
First, conventional wisdom
When the question of best time of day comes up the answer often put forward is the London/New York overlap period. The reason here is a combination of volume and volatility. London is the center with the highest average forex market trading volume, and New York comes in second (see The Most Traded Currency Pairs for specifics on which pairs are the most active globally and across regions). As such, there is maximum liquidity during this time of day for the major traded currency pairs.
On the volatility side of things the London/NY overlap is also the period when many of the most significant data releases and news items are released. Obviously, the NY morning is when most US data headlines post. Most UK and European data hits before NY gets going, but central bank statements and press conferences do happen in the NY morning. Also, key speakers often have their comments crossing the wires during the overlap period. In other words, there is a lot of news and data to move the markets and create volatility.
Thus, the London/NY overlap period offers volatility and liquidity, which many folk see as keys for worthwhile day trading. But wait!
The folks at DailyFX did a study a few months back looking at the performance of FXCM clients based on the time of day they traded. The results they came up with were entirely contradictory to the conventional wisdom noted above. They argue that it’s the lower volume NY afternoon, Asian, and early-European sessions which see the best trader performance.
The author’s argument is that most individual traders tend toward a range-trading approach. This style of trading is ill-suited to volatile markets. As such, the news and data induced volatility we see in the London/NY overlap period is actually a negative for trading in the major pairs. They include a graph which shows a clear trough in the success rates of trades in the NY morning and another that shows the relative volatility peaks at that time of day.
Now, as I wrote in Optimize trading performance by time of day selection, there are some issues with the DailyFX article in its focus on win % as its main metric. The authors did include some system performance figures which provide some more results to back up the overall premise, though. As a result, I think it’s worth at least taking a very hard look at how your trading would do in different time frames during the day.
Makes you have to start wondering about conventional wisdom, doesn’t it? It should also have you thinking about opportunities to diversify your trading time of day. This may not be something you can do yourself because of your available time and locale, but using an autotrading system might offer you an opportunity to do so.
Editor’s Note: Originally derived from the webinar, the question examining what time of day is best to trade Forex had been answered by Trade Leader Taylor Growth during the Q&A session. Since he is a range trader himself, his response was congruent with the second part of the above answer, which leans towards the lower volume NY afternoon, Asian, and early-European sessions as yielding the highest trading success rates.
Taylor Growth explained that the best time of day to trade really depends on the strategy the trader is using. Since his conservative strategy is very technical, he believes it fares better in Asian sessions when trading European pairs. Since it is nighttime in Europe while the Asian markets are most active, no European news releases are making their way out and influencing trades.