Trading Sessions & Trading Styles

In this lesson we will examine:

– The trading sessions with more volatility
– Liquidity and volatility in trading
– Flash crashes & bubbles (short squeezes)
– Trading styles – from short to long-term trades

The Forex market, as we have seen earlier in this course, is open 24 hours a day, five days a week. This allows traders from all over the world to trade at some point during their day.

However, trading conditions differ throughout the day. Some parts of the day – or a ‘session’ as they are often referred to – are different than others, and are characterised by greater volatility and higher liquidity.

With specific periods being more prone to volatility, it’s important to know how your trades might be affected throughout the day, and minimise your risk accordingly.

Sessions and Volatility

Generally, there are three established periods when activity typically rises. These are known as the:

– Asian Session
– European Session
– US Session

They are also referred to as the Tokyo Open, London Open and New York Open, because these three cities are the biggest financial centers in the world, where large, influential institutions are located. In addition, the Sydney Open is part of the Asian Session, and the Frankfurt Open is part of the European Session, although these centers are not as impactful as Tokyo and London.

The table below shows the core trading times in the various centers, in British Summer Time:

You can use the resources on the websites below to calculate the sessions for GMT in winter, or for other international time zones. All sessions are automatically adjusted for daylight saving, where applicable (please note, we are not responsible for third-party content):

– Forex Timezone Converter
– Forex Market Hours

When trading starts in London (8:00 am GMT/BST), volatility and liquidity increase, which means prices move faster and further than they do during the Asian Session.

Different instruments behave differently between trading sessions. For example, the Australian Dollar/US Dollar (AUD/USD) pair typically moves most during the Sydney Open, during the Asian Session, and again at the New York Open.

Indices CFDs are also more active when the underlying exchange opens – the DAX is most volatile during the Frankfurt Open, the FTSE100 during the London Open and the SP500 CFD is most active at New York Open.

Flash Crashes & Bubbles

Low liquidity normally results in stable markets in financial markets: because there are less participants, the markets will tend to be sideways or ranging.

However, low liquidity can result in so-called ‘flash crashes’ from time to time. For example, in October 2016, the British pound fell by more than 5% in a second after the US session closed. A similar situation happened in March 2016 when the price of gold crashed, only to recover a few seconds later.

Flash crashes can happen for a variety of different reasons, and it pays to be prudent. Reducing trading activity when low volatility is expected – for example from about the 15th December through to mid-January – can help mitigate these situations.

Markets, particularly stocks, can also “melt up”. Meltups are generally caused by “bubbles”, wherein investors begin investing in assets in ever greater numbers because they don’t want to miss out on profits (a phenomenon known as “FOMO” – Fear of Missing Out).

When looking at bubbles across the last decades in assets such as stocks, bitcoin and commodities, most bubbles burst after melting up by at least 40%. Some bubbles melted up 100% or more. Meltups are usually not immediately apparent at the time. Once it becomes evident, investors may have used huge leverage and exposed themselves to tremendous downside risk.

One of the most extreme examples in recent times was Bitcoin. In 2017, Bitcoin more than doubled within one month. It subsequently lost almost all of the gain once the bubble burst just as quickly as it had gained it:

When the Nasdaq Composite peaked on March 10, 2000 at 5,048.62, it had almost doubled within six months. When the reckoning came, the drop was sharp. The Nasdaq lost over 30% within a month. It took around a year to descend down to a level where the meltup had originally started, and then continued to fall further down from there.

Trading Styles

When trading currencies and CFDs, you need to first determine which style suits you and your trading personality best.

Are you comfortable trading volatile markets on short timeframes, or do you prefer lower liquidity and holding positions over a longer period of time? Do you want to hold your trades overnight, or over a period of weeks, days or months?

Decide how much time you can dedicate to trading, and find an approach from the following that best fits your lifestyle and goals.

Below are the four basic types of trading. Timeframes are taken from the MetaTrader 4 program as below and are explained in further detail.

Scalping

Scalping occurs when a trader chooses to enter the market, attain a small profit and then immediately close the trade once profit has been attained. Scalpers trade from a few seconds to several minutes and generally trade on lower timeframes such as minute (M1) and five minute (M5) charts.

Scalping can be very stressful and is not recommended for new traders.

Day Trading

Day traders differ from scalpers as they have different goals. Day trading requires several trades to be made every day, using technical analysis to capture profits.. Day traders may have a set limit of profit or loss for the day and then stop trading until the next trading day. They also typically close all trades so they do not rollover to the next day of trading.

Day traders typically trade on fifteen minute (M15), thirty minute (M30) and hourly (H1) charts, although some may use M5 charts as well for finding the best entry points.

Swing Trading

Swing trading is a medium-term trading style that is used by Forex traders who try to profit from price swings. Swing trading requires patience to hold trades from several days to several weeks at a time. Although swing trading requires much less screen time than scalping or day trading, it requires discipline because the win rate can be very low, perhaps as few as 20% of trades might be winning ones. However, this is made up for by the fact that winning trades will yield very high rewards (we will cover risk:reward in more detail in a later chapter of this course).

Swing traders may use four hour (H4) daily (D1) and weekly (W1) charts in their trading.

Position trading

Position trading is the longest term trading style and can have trades that last from several months to several years! Position traders ignore short-term price movements in favour of pinpointing and profiting from very long-term trends. This type of trading most closely resembles investing on a “buy and hold” basis, although of course in Forex you can also “sell and hold” as well. Position traders have very large stop losses but have even larger profit targets. Position trading requires a huge amount of patience and restraint because trades will go against you as the market fluctuates.

Position traders may use D1, W1 and monthly (MN) charts in their trading.