Quick pop quiz! What time of the day are TV ratings highest? If you said during prime time, then you would be correct!
What does this have to do with trading sessions? Well, just like TV, “ratings” (a.k.a. liquidity) are at their highest when there are more people participating in the markets.
Logically, you would think that this happens during the overlap between the two sessions.
If you thought that way, you’d only be half-right.
Let’s discuss some of the characteristics of the two overlap sessions to see why.
Liquidity during this session is pretty thin for a few reasons. Typically, there isn’t as much movement during the Asian session so, once the afternoon hits, it’s pretty much a snooze fest. Zzzzzz.
With European traders just starting to get into their offices, trading can be boring as liquidity dries up.
This would be an ideal time to take a chill pill, play some putt-putt golf, or look for potential trades to take for the London and New York sessions.
According to the latest data from FXLIQUIDITY, an analytics service for the FX market, liquidity is at an optimum level around 10 am and 3 pm London time (10 am NY time).
This is when the real shebang begins! You can literally hear traders crack their knuckles during this time because they know they have their work cut out for them.
This is the busiest time of day, as traders from the two largest financial centers (London and New York) begin duking it out.
It is during this period where we can see some big moves, especially when news reports from the U.S. and Canada are released.
The markets can also be hit by “late” news coming out of Europe.
If any trends were established during the European session, we could see the trend continue, as U.S. traders decide to jump in and establish their positions after reading up what happened earlier in the day.
Lastly, it’s important to know that it is during this period where the WM/Refinitiv Spot Benchmark Rate is determined. The rate is set at 4 pm London time, and also known as the “London fix”.
A currency “fixing” is a set time each day when the prices of currencies for commercial transactions are set, or fixed.
Since currency prices fluctuate from second to second, a daily “reference point” is needed.
Banks and other financial institutions use this daily rate to set their currency exchange rates, which in turn determine the prices used in corporate foreign exchange transactions.
From a trading standpoint, this daily fix may see a flurry of trading in the market prior (generally 15 to 30 minutes) to the fixing time that abruptly disappears exactly at the fixing time.
Lastly, some European traders may be closing their positions as their day ends, which could lead to some choppy moves right before lunchtime in the U.S.