Timing your trading to perfection

IF you’ve ever sat and tried to trade on a thin, illiquid day, you’ll know just how important it is to think about what time of day you trade. As part of your trading strategy, it is important to consider how much market activity happens at certain times – greater volume helps to drive trends and breakouts. This is typically at the European and US market opens and at significant economic data releases and central bank decisions. “Most traders prefer a liquid market as it keeps spreads on the bid-offer price low and thereby keeps trading costs low,” says Brenda Kelly, market analyst at CMC Markets. “The greater the volume of trade in the market, the easier it is to both trade in and out of the market.”

Currency sessions
In the FX market, the times of highest daily volume happen on the overlap between trading sessions. As an over-the-counter derivative, FX pairs can be traded 24 hours a day, but the day can be split into three main trading sessions. The Asian session runs from midnight (GMT) until 9am. The London session from 7am until 5pm and the New York Session from 1pm until 10pm. The most active time is when London and New York traders are at teir desks at the same time – from 1 pm until 5 pm. As the two largest FX markets in the world, 80 per cent of the day’s price range move happens during the US session and 70 per cent during the UK session. Of course, not all currencies act the same way. The yen tends to be the most volatile during the Asian session, compared to the pound or dollar, as this is the Japanese business day (see charts, below).

Timing it right
Just how much do spread betters and contracts for difference traders think about timing when they should be trading? “I suppose that you could say the beauty about spread betting is that people can do it whenever and wherever they want,” says Ian O’Sullivan, head of sales for SpreadCo. As a result, though most people will stick to times when the market is most liquid, there are still plenty of retail traders that trade whenever they have time. “Client activity only really lightens up when volatility is low,” says O’Sullivan. “High volatility means high activity.”

Short-term moves
But low volumes and liquidity are not always a bad thing, especially if you are a short term trader. Stock markets spike on low volumes – so a small group of people trying to move the market can be to your benefit. However, when there are large volumes driving the price in one direction, it’s usually a sign that you should follow the wisdom of the masses and move with them. According to Brenda Kelly: “While some would discount volatility as a negative part of investing, for those who can trade both sides of the market, it’s indispensable.”