The best times for currency trading-WWNEED.COM
The forex trading market is open for 24 hours from Monday to Friday before closing on weekends. This represents 120 hours of trading time each week. So there is plenty of time for every forex trader to start looking for opportunities. Since every forex trader is looking for opportunities to achieve returns, the question of the best times to trade currencies and the best time to trade in the currency market is very normal.
Theoretically, all traders in the currency market can make money at any time. However, when it comes to scale and opportunity, not all days are the same. Every expert trader has his own opinion on the matter and they tend to disagree with each other. So it is probably much better to look at objective data instead to draw objective conclusions.
What are the best times for currency trading?
January, February and March may not be the best months for forex trading, but analyzing this period may give us an idea of the overall picture.
As we can see from this chart, on average, Monday traders have the fewest trades and then as the week progresses volume rises steadily until it peaks on Friday.
The best and worst times to trade the currency market
The trading volume is higher on Mondays when there are some events, however, the number of trading contracts is less on this day compared to other days. For example, during the period from January 5 to March 20, 2000, average volume on the first day of the week was 17% lower than on Friday.
How do we explain this? Are Mondays the worst days for currency trading?
Several observations can be made which include the following:
Volume is lower on Mondays, so momentum is weaker.
During the following business days, the number of trading contracts increases.
Fridays are the best time to trade currencies because they have the highest volume.
In the early morning, volatility is low, and there are very few economic data releases, so many Asian and European traders are reluctant to enter trades before market trends become clearer.
There are hardly any economic figures released on the weekends, however, some important political events could still happen. Since the market is closed by then, it is impossible to see how the forex market will respond to these developments.
Obviously, the trader’s response to these events will start to emerge from Monday. At times of relatively low volume, this can lead to very unpredictable moves.
This is why many experienced traders usually don’t make many trades on Monday. This does not mean that this is always the case, if there is some major announcement or unexpected news, the market will not wait another day to make a move. Sometimes trading on a Monday can be a little busier.
Try to determine the direction of the best trading times in currencies
Under normal circumstances, determining the best times to trade in the currency market becomes easier for most traders. Sometimes certain trends and biases become clearer and the volume is higher.
It is also noted that the inflation date in the respective Eurozone is frequently announced for each day. Sometimes, it may be about individual member states, but more often it can be about the entire currency bloc.
The ECB has only one mandate, and the main objective is to keep inflation low, but close to 2%. This is unlike the Federal Reserve, which has no unemployment target.
Therefore, inflation data in the Eurozone can be useful when dealing with Euro-based pairs. If the HICP (Harmonized Index of Consumer Prices) falls below 1.5% or 1%, this could lead to further easing from the European Central Bank and thus pressure on a single currency.
The effect of leveraged trading
Obviously not all central banks set the same rate, some of them have higher yielding currencies.
From 2001 to the financial crisis of 2008, this strategy proved to be very profitable. For most of this period, the Bank of Japan kept interest rates near 0.1%, while at the same time, the Reserve Bank of Australia kept the cash rate between 4.25% and 7.25%.
Then, those traders who were long on AUD/JPY took advantage of those spreads and earned interest on a daily basis.
Now, earning 4% to 7% ROI is beneficial, it’s like having a high yield savings account. However, from a trading perspective, this may not sound very impressive.
However, we must bear in mind that this is a leveraged investment. Suppose a trader puts $10,000 into his forex account. If he was using 1:20 leverage, a position of 100,000 AUD/JPY would earn him $27.41 per day or $834 per month. It is clear that carry trades have some risks, especially in times of crisis, but some traders still use them.
What does this have to do with Wednesdays?
Well, the income is calculated from the interest rate differential for each business day. However, on Wednesdays, the triple rollover is granted for Saturday and Sunday accounts.
So going back to our previous example, the trader would earn $82.23 for holding a long AUD/JPY position, which is more than the usual $27.41 profit.
The net effect of this factor is that traders who have opened such positions in which they benefit from interest rate differentials may prefer to hold them to earn additional income.
The opposite is also true. If the same trader has a short AUD/JPY position by then, he will be charged $82.23. So as we can see, there is very little incentive to hold on to that.
This factor makes Wednesday trading more predictable and may be beneficial for many traders. This is the reason why people consider Wednesday as the best time to trade currencies, or at least one of the best times to trade currencies.
It is also worth noting that most of the time the Fed releases the results of its monetary policy meeting on Wednesday. With expected changes in policy and rates, this can make the market more volatile.
Central bank announcements
Thursdays can be important for the EUR and GBP pairs. The European Central Bank and the Bank of England hold their governing council meetings on Thursday. This can make EUR/JPY, GBP/USD, GBP/JPY, and other pairs more volatile.
When it comes to placing trades after central bank announcements, it is worth noting that the market always tries to guess the outcome in advance.
There is one strange phenomenon that baffles many traders. Conventional wisdom tells us that when a central bank lowers its key interest rate or announces quantitative easing, the currency it issues may decline.
However, we have seen many examples where the ECB was widely expected to cut interest rates, but when it was announced instead of crashing, the Euro remained stable and even appreciated.
This tells us that the rate cut has already been priced in, so the actual decision didn’t make much difference.
As the chart shows, the average EUR/USD trades reach their highest volume by Friday, so there should be a number of good trading opportunities.
However, it is also worth considering that many traders, due to the approaching weekend, are trying to close their positions. So profit taking could become a major factor under this scenario.
Trading on Friday may become very risky. A trader may correctly identify the trend on Tuesday and open several deals. However, during the last business day of the week, the market turns into a take profit mode, and this can lead to reversals
All of these above reasons may indicate that Friday is not the best time for currency trading.
The Non-Farm Payroll (NFP) number, one of the most important measures of employment in the US, is usually released on Fridays. As the name suggests, this indicator excludes the entire agricultural sector, which is more seasonal than other parts of the economy. This announcement also encourages an increase in volatility, especially in currency pairs that depend on the US dollar.
Finally, finding when to trade forex is important for day traders in the short term. Let’s not forget that there are also many long-term traders and investors out there. Therefore, if there is a serious opportunity that is undervalued in the markets, choosing a day of the week to execute the deal may not be as important as in the previous case.
Frequently Asked Questions
Is trading during low volumes riskier?
To answer this question, it is important to realize that low volume does not necessarily translate into low volatility. To illustrate, let’s look at historical data for the GBP/USD pair, for example. During March 9, 2020, the pound appreciated by 72 pips against the dollar. However, the British currency collapsed in the next four days, losing over 845 pips in total.
As we can see, the main problem with low volume is that market sentiment is not clear and it is very easy to misjudge the situation. In the previous example, several traders who opened a long GBP/USD position lost a large amount of money in the following days. Without the stop-loss order, their entire position could have been wiped out.
If the trader had waited a day and assessed the situation on Tuesday, it would have been clear that a new trend was developing against the pound, and therefore having a long position in the GBP/USD would not have made any sense.
How should day traders deal with risk events?
CPI, unemployment, NFP releases, and central bank rate decisions are often called “risk events” because they typically lead to a spike in volatility.
Major central bank announcements can easily follow a 100 to 300 pips change in the relevant currency pair. This creates many profit opportunities, but how can a trader respond to this?
In fact, trading major interest rate changes may not be as straightforward as it seems. Let’s assume that the European Central Bank is widely expected to cut interest rates, and leading financial experts do so, with market sentiment remaining the same.
However, simply opening long positions before the announcement may not always be the best idea. This expectation may always be priced into the market and even if the ECB does, it may value it in EUR. Traders may expect more QE or bigger cuts, but they can always be disappointed.
Misreading this situation can easily lead to some huge losses. This may not be the best time to trade forex. So it would be much easier to wait for a while, as the smoke may clear after the announcement and then judge the market reaction and place trades after that.
Why is leveraged trading popular with some traders?
This strategy is more popular with long-term traders. The fed funds rate is back in the 0% to 0.25% range. Even 6 months ago, a depositor could earn up to 2% on their online banking CDs and savings accounts. However, in reaction to the Fed’s decision, even those institutions began to cut their rates.
So instead of putting their money into 0.1% accounts, many traders looked for more profitable alternatives. Besides dividends and rental properties, mobile trading may be another avenue for income investments. As we saw before the 2008 crisis, traders can earn up to 4% per month with a leverage of 1:20.
The problem with carry trade this time around is that there aren’t many options. The Reserve Bank of Australia has cut interest rates significantly, to 0.25%. The New Zealand central bank keeps rates at the same level. The Bank of Canada maintains its benchmark index at 0.75%. Therefore, the best time to trade currencies in Australia, New Zealand and Canada varies widely.
The Russian ruble and the Turkish lira both have higher yields, but these currencies are riskier with a long history of depreciation, so they are unlikely to attract carry traders.
How often do currency trends change during the middle of the week?
We have already discussed the dramatic trend change in GBP/USD during the middle of the week, however, do we see such a scenario happening too often?
Looking at the price history of the USD/JPY currency pair, we can see that for the last 3 out of 9 weeks, the trend that developed on Monday has mostly remained the same. Meanwhile, over the remaining six weeks, there have been major reversals.
So in two-thirds of these cases, the trader would have lost money if he had followed the trend and not adapted to market changes.
Do Emerging Market Currencies Have A Different Trading Pattern During Weekdays?
It is useful here to keep in mind that most traders regard emerging market currencies as riskier propositions. This is for two main reasons. The first is that currency traders can be one-sided. One such example is the Turkish lira, a USD/TL pair as recently as 2013 was trading at 1.80 and at present the price is hovering around 6.40.
Such a dramatic and unilateral change is completely uncommon for currency pairs such as EUR/USD or USD/JPY.
The other reason is related to the inflation of large differences. For example, the United States and the United Kingdom have roughly similar inflationary dynamics, so relative parity in treatment remains fairly stable.
This is one of the factors that can explain the unilateral trend of the USD/TRY trend. Constantly high inflation in Turkey is shifting relative purchasing power in favor of the US dollar. Hence this significant trend in the depreciation of the lira.
This is why many traders prefer to close their positions in emerging markets by Friday. In this way, they can reduce potential exposure to those risks by either taking profits or limiting losses.
As we discussed earlier in this article on the best times to trade currencies, economic events and data can influence the usual pattern of trading volumes, however, on longer-term Mondays, the currency market can be less volatile than on other days. Usually, Thursday and Friday get the largest number of trading deals, and Tuesday and Wednesday are in between.
In most cases, Tuesdays, Wednesdays and Thursdays can be less risky for traders. However, traders should not always shy away from Monday and Friday trading if they get a good chance. So it is not always easy to determine the best forex trading times.
For long-term trading, the patterns of the days of the week are not as important as the short-term. These trades mostly work from a long time frame perspective. Thus, finding some undervalued trades is even more important for a day trader.
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