The forex markets are open 24 hours a day, but not all hours are created equal.
Trading volumes are known to vary significantly throughout the day. But I’m not one to listen to anecdotes, so I decided to dissect my broker data and verify it for myself.
It’s in the Data
Here’s how you can do the analysis for yourself.
Open up the history center in MT4 by pressing F2 and download whatever historical data you need.
For this case, I will focus on H1 data for the EURUSD. My data extends from July 2023 to Jan 1999.
Besides the timestamp, you get the OHLC for each bar, and its corresponding tick volume.
Tick volume refers to the number of prices changes, or ticks, each bar has had. In the absence of centralized trading volumes, tick volume serves as a good proxy indicator of trading activity.
Export the data as a csv file to have fun with it.
After filtering by hour, I summed up the tick volume for each hour and plotted the following tick volume chart as a function of the time of day.
Times are in the UTC +2/+3 (EET) zone, with 0000hr corresponding to the 5pm New York close. Broadly speaking, there are three major sessions per day: Asian (Sydney + Tokyo), London and New York. There is no hard opening/closing time for each session since trading volumes are the aggregate of all the businesses operating in each region.
The Asian hours are relatively quiet, since most of the world’s largest transactions occur in the London and New York regions. Volumes peak during the ~4 hour overlap between the London and New York sessions.
Best Time to Trade Forex
In general, trend following strategies perform better with high volume. Prices move because of imbalances in buying/selling pressure, which are magnified when volume is high.
On the other hand, mean reversion traders seek to exploit a temporary price extension, often caused by random noise, betting that it will reverse shortly. Such strategies therefore perform better during quiet markets, when lower volumes cannot support a sustained trend.
Here’s my personal take:
Higher Timeframes
If you trade a higher timeframe, like 1-hour and above, you’re probably going to be in the market for days or even weeks. A time-of-day entry filter is unlikely to provide much benefit since you will be exposed to unfavorably high/low volumes anyway.
Lower Timeframes
For lower timeframe strategies, say M30 and below:
- Trend following strategies: Entering shortly after the London open seems wise. There’s a large increase in trading activity, which will increase further when New York joins the party. London breakout strategies are quite popular for this reason.
- Mean reversion: Entering shortly after the New York close, seems to be the best option.
Beware of the spreads around and shortly after midnight (New York 5pm) though. I previously conducted a spread study on the GBPCAD, and the spread widening from 12-1 am certainly isn’t pretty.
Some brokers close their markets around the 2355-0005 hr window, which will save you from unpleasant transactions. Otherwise, you can temporarily prevent entries or remove your stop loss in this window.
Trade Management Issues
If you’re trading on the lower timeframes, you may have some decisions to make when you approach unfavorably high/low volumes.
For trend following, I’ve observed that many markets tend to stagnate or even reverse slightly after 12 pm New York time, especially on Fridays. You may consider tightening your stop, or exiting your position partially or even fully.
The same applies for mean reversion strategies when you approach the London open.
Of course, there’s nothing wrong with leaving your position untouched. If in doubt, run the most reliable backtest you can, and let the results guide you.
If you need help programming your strategy, check out this AlgoWizard guide where I program an EMA + RSI strategy.
Your Strategy/Market/Broker Matters
As always, your unique trading preferences will dictate your requirements; there is no universal approach to trading. (except being conservative with your position sizing, perhaps)
Like prices, volume data is broker-dependent. The volume trends illustrated above are well-established, although you can expect some minor variation across brokers. If you wish to implement some sort of time-of-day filter, I recommend you do your own independent analysis, perhaps using the approach above.
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