Forex Trading Strategies and Forex Market Volatility

Posted: Jan 22, 2008 | Comments: 0 | Views: 138 | Bookmark and Share

Part of developing a profitable Forex trading strategy involves being able to determine market volatility. The Forex market is open 24 hours per day and you will find it impossible to keep track of all market activities, all the time. You will need to understand the timing of various markets, particularly those in which you are trading and those that influence your trades, so that you are in a position to make the best possible decisions during your trading hours.

Different markets are affected by differing market conditions. All currency pairs are subject to market volatility, but most currencies tend to become more or less volatile during certain times of the day. As a trader, you will need to have some knowledge of the currency trading system, currency pairings in different times zones and the conditions that affect their volatility.

The London market is the largest and most volatile Forex market in the world since some of the largest dealing desks of large banks are located there and transactions that take place usually involve large sums of money. The London market share is about 30% of all markets. The market hours are from 2 am to 12 pm EST, which is also the time for which most transactions are completed. The benchmark established for volatility is 80 pips and more than half of the London market currency pairings are likely to reach in excess of 80 pips. It would not be uncommon for the daily range of GBP/CHF and GBP/JPY currency pairs to average more than 140 pips. The ability of these currency pairs to generate huge profits in a short amount of time appeals to traders willing to take risks in the currency trading system.

Since most large market participants complete their circle of currency conversions during the London market hours, daily trade activities peak during this time, causing high volatility. Near the end of the London trading session most large investors will convert their European assets to US dollar assets in anticipation of the opening of the US market. This conversion is responsible for the increased volatility in GBP/CHF and GBP/JPY currency pairs. The New York trading session is the benchmark for US trading and it represents the second largest FOREX market. Trading hours are from 8 am and 5 pm EST. The majority of transactions occur in the US market from 8 am to noon EST. During this timeframe, the European market is still in session, which creates a market of high liquidity. Trading during this period of overlap accounts for about 70% of the currency pair trading in the European session and about 80% of currency pair trading in the US session.

Other currency pairs that appeal to high-risk traders during the London market hours include the USD/CHF, GBP/USD, USD/CAD and EUR/USD currency pairs. It is not uncommon for these pairs to reach a daily range of about 100 pips. This level of volatility creates opportunities for entry into the market. In contrast, is not uncommon for the AUD/JPY, EUR/CHF, AUD/USD and NZD/USD currency pairs to reach a daily range of about 50 pips. This level of volatility is more appealing to traders who attempt to avoid risks. The level of volatility indicates that these pairs may be less likely to create a loss.

The London market also overlaps with the Asian market. The Tokyo trading session is the benchmark for the Asian market. Trading hours are from 7 pm and 4 am EST. Large investors take positions in the Tokyo market in anticipation of the opening of the London session. The GBP/CHF and GBP/JPY currency pairs are also highly volatile during this timeframe of overlap. Trading during the period of overlap, which is between 2 am and 4 am, is the lowest of any trading session. Traders use these slow trading hours to position themselves for the opening of the European or US market.

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