What Time of Day is Best to Trade?

I am often asked if there's a best time to trade during every day. Like any general who is going into battle he always wants to pick the “High ground” to fight from and it's the same for trading. There are certain times when it's worthwhile looking at trading and there are times when you best to avoid. You can break the trading 24-hour day into three distinct segments all these are UK time.   

1. Asian Session (12:00 a.m. - 7:00 a.m. UK time):

• This session includes major markets in Tokyo, Shanghai, and Sydney.
• The Asian session is generally characterized by lower volatility compared to the European and American sessions, as trading volumes are lighter.
• Pairs involving JPY, AUD, and NZD tend to be more active during this time.
• Trading during this session is usually smoother, with fewer significant price movements, making it a quieter period unless there is breaking news or economic data releases from these regions.

2. European Session (7:00 a.m. - 12:30 p.m. UK time):

• The European session begins as the Asian session is winding down, bringing in major financial centres such as London, which is one of the largest trading hubs.
• Volatility tends to increase as European markets open and overlap with the end of the Asian session.
• Currency pairs involving EUR, GBP, and CHF are more active, with generally more substantial movements due to higher trading volumes and news releases.
• This session often sees significant activity as traders position themselves based on European and UK economic reports.

3. American Session (12:30 p.m. - 9:00 p.m. UK time):

• The American session officially kicks off with the opening of the New York Stock Exchange.
• This is typically the most volatile period, especially during the overlap with the European session, which lasts from about 12:30 p.m. to 4:00 p.m. UK time.
• USD pairs tend to see heightened volatility, as this session is highly influenced by U.S. economic data, news, and investor sentiment.
• After the European markets close, trading may slow, though certain events, particularly U.S. news releases, can continue to drive movements. 

I think one important bias that I've noted over the years is that quite often movements are exaggerated coming into the European session.  

1. Exaggerated Moves in the Asian Session:Due to lower liquidity and the absence of European and American participants, the Asian session can produce outsized moves in reaction to news that may seem relatively minor or unsubstantiated. These moves may appear disproportionate, given the lack of participation from the major Western markets, creating exaggerated price levels by the time Europe opens.
2. Reversal Opportunities at the European Open (7:00 a.m. UK Time):Often, these overnight price shifts correct themselves as the European traders bring a fresh perspective. European investors may perceive that the Asian session reaction was excessive and adjust the market to what they consider more realistic levels.
3. Impact on Indices and FX Markets:This effect can be particularly pronounced in U.S. indices (like the S&P 500 or Nasdaq) and major FX pairs involving the USD, EUR, and GBP. News from Asia that impacts these assets disproportionately can often reverse, offering a solid setup for contrarian trades at the European open. 

Strategy to Capitalise on the Bias 

To turn this bias into a systematic approach, consider the following steps:

1. Identify Significant Overnight Moves:Each morning, assess the price action in major indices and FX pairs during the Asian session. Look for significant movements that appear to be based on trivial or relatively low-impact news from the Far East. Tools such as news feeds, economic calendars, and sentiment analysis can help you gauge whether the news justifies the move.
2. Establish a Bias at the European Open:If the move seems exaggerated and lacks a strong fundamental basis, plan to position against it. For instance, if Asian markets have pushed U.S. indices down on moderate news, you might look to enter long positions on dips, expecting European traders to push prices back up as the session progresses.
3. Scalping or Position Holding:Based on your experience, if you know the overall bias is likely to be up, you can scalp small dips during the European session to build a position. Each minor retracement presents an opportunity to add to the position at a more favourable price, if your analysis confirms that the larger trend will likely reverse or stabilise.
4. Exit Around the U.S. Open or when Reversion Occurs:Historically, if your analysis holds, you may see the market reverse by the time the U.S. session comes online, or earlier in the European session. Exiting around this time allows you to capture the reversion without staying exposed as U.S. markets introduce new volatility and liquidity. 

Example in Practice 

Imagine you’re tracking the S&P 500, and it’s dropped significantly overnight due to minor economic news from China that’s unlikely to affect U.S. fundamentals in the long term. When you see this exaggerated decline coming into the European session:

• At 7:00 a.m., start by watching for stability or a slight rise as European buyers step in, indicating a potential bottom.
• Enter long positions on dips, scaling in as the market confirms upward momentum.
• Set stops just below the overnight lows to protect against unexpected continuation.
• Consider exiting or scaling out as prices stabilize or retrace by mid-session, ideally as the American session approaches. 

Benefits of This Approach 

• Higher Probability Entries:Since the exaggerated moves tend to correct, your entries are backed by a historical pattern and the likelihood of reversion, giving you an edge.
• Controlled Risk:Knowing your bias and setting stop-loss levels aligned with the overnight low allows for controlled risk 

News Items

 Having an economic diary and tracking high-impact news events is a key part of successful trading, especially when you’re dealing with volatile markets. High-impact events like U.S. unemployment figures, FOMC announcements, interest rate decisions, and CPI reports can heavily influence market direction and sentiment. Here’s a structured approach for trading around these events: 

Step 1: Tracking High-Impact News Events with an Economic Calendar 

An economic calendar should always be part of your trading setup, especially if you’re not yet an experienced trader. These events tend to drive volatility and can create sharp moves or changes in trend, making them high-stakes opportunities. Key events to track include:

• U.S. Non-Farm Payrolls (NFP)and unemployment figures
• FOMC meetingsand interest rate decisions(Federal Reserve, Bank of England, European Central Bank, etc.)
• CPI and inflation data
• GDP releases
• Trade balance reportsand other major economic indicators 

Focus on events that are marked as “high impact” on economic calendars since these are more likely to result in significant market moves. 

Step 2: Preparing for Market Conditions Leading Up to High-Impact Events 

The day before a high-impact event, markets often enter a period of hesitation and low-volume, choppy trading. Investors and institutions may reduce their positions, and some funds may not be allowed to open new positions just before these announcements, resulting in lower liquidity and unpredictable price swings.

• Choppy Market Conditions: Recognise that in the lead-up to an event, the market may lack direction and exhibit choppy behaviour, which can be difficult to trade.
• Trade Lightly or Stay Out: This period can be difficult for directional trades due to its erratic price movements. If you do trade, approach with caution, as price action may not follow any clear trend until after the news.
• Set Alerts for Key Event Times: If you prefer not to trade in uncertain conditions, set alerts for when the news is expected to hit, and only begin looking for opportunities after the release. 

Step 3: Trading After the News Release – Capitalising on Initial Volatility 

When the news hits, there is often a significant market reaction, especially if the results deviate from expectations. This can create large swings, but also great opportunities for short-term traders, especially scalpers.

• Expect Panic and Volatility: The immediate reaction can often be chaotic as traders react to the surprise. Order flows come in rapidly, levels are tested and often broken, and price can swing in both directions.
• Identify Extremes: If you see the price quickly reaching extreme levels—such as major support or resistance levels on a higher timeframe chart—there’s an opportunity to scalp by anticipating a short-lived reversal. This is often where the “panic” begins to subside and short-term positioning cools. 

 

Conclusion 

A small amount of preparation before trading to know whether any significant events are due during the day and some observation as to what has happened earlier in other time zones can give you a lead as to initial early market bias. It is always much better to have a plan when going into battle – you may not win every battle, but you are much more likely to win the war!