The way financial markets and prices of financial assets move often follows a certain rhythm and very specific rules. Furthermore, depending on the time of day and the general market environment, the way prices move can change significantly with very clear patterns.
Volatility, momentum and expectations
The reason why it pays off to be aware of the time of day you are trading in and the implications for financial markets is that you can often see significant differences in the way price move. An experienced trader, thus, adapts with his trading style based on the general market environment.
- Changes in volatility are most obvious and financial markets often follow a specific rhythm that we will explore later. During the most active times, volatility often picks up strongly and then drops off in lesser active sessions.
- The way momentum manifests on your charts changes with the amount and the size of financial players that join a market. During the active trading sessions, you can usually expect to see larger price moves.
Of course, this all affects how a trader should approach the markets. When volatility is about to increase, he can possibly use wider stop and target orders to account for larger swings. Also once in a profitable trade, he can choose to let his trade run for an extended period when he trades in a high momentum environment.
Stop loss disclaimer: Placing contingent orders, such as “stop loss” or “stop-limit” orders, will not necessarily limit your losses to the intended amounts, since market conditions on the exchange where the order is placed may make it impossible to execute such orders.
Global trading sessions
The effects of changing volatility and momentum is mostly visible in Forex trading. The Forex market is open 24 hours a day, 5 days a week but the individual currencies are most active during the trading session of the local market. This means that EUR and GBP Forex pairs move most when the Frankfurt and London stock exchange are open; the CAD and the USD are most active during the American trading session and so on. When the local trading session is over, Forex pairs still move, but volatility and momentum levels can change dramatically.
If you are a Forex trader, pick the currency pairs that you are trading based on your timezone and also when you are able to trade actively. Following pairs that are not active during your time can often lead to making wrong assumptions and false trading decisions.
If you are an index futures trader try to trade the ES during the North American markets, the FDAX during the Euro Sessions and the Osaka Emini Nikkei 225 during the Asian session hours.
Intraday sessions
We mentioned that global trading sessions can impact certain asset classes in different ways, but also the different intraday trading hours often bring changes in price and volatility behavior.
(1) The open
The open is usually the most active time intraday and many traders and professionals are most active during the early trading hours. Some traders may wait 30-45 minutes before trading because a common open pattern is a strong move which then may reverses once all the news from the overnight and new economic releases are factored in.
(2) Midday
Pre-lunch, you can often see a drop in trading activity and then an increase again once the professionals return to their desks. This effect is less pronounced than the opening trading hours, though. Some international markets still pause trading activity completely during the lunch time but most markets remain opened.
(3) Pre-close
After a strong trending day or after price has been trending for a few days, reversals are more likely to happen during the pre-closing time as investors take profits.
General price behavior tips
Regardless of whether you trade Forex, Futures, CFDs or stocks, some news events impact all markets in very similar ways and it’s important to keep track of upcoming news events at all times.
(1) Ahead of news
Before important news events, momentum often decreases as financial players and traders are waiting for the actual release. This effect is more pronounced the bigger the news event. At the same time, such a market is vulnerable to sudden volatility spikes when general volume is low and relatively smaller positions can move a market more.
(2) Post news and weekend events
- Volatility during a news event can increase significantly and it’s often advisable to stay out after a news event until the markets have calmed down and reached normal volatility levels again.
- There are often press conferences, central bank meetings and other high impact macro events happening over the weekend which can, if the outcome is surprising, have large impacts on the Monday morning open. Weekend emergency events may even start on the GLOBEX session on Sunday open.
In such cases, you can often see larger gaps once the market opens and, thus, weekend exposure can increase the risk for traders. We always encourage day trader to close their positions each day at the end of the day session and specifically before the weekend.
(3) Pre holidays and weekends
Always keep in mind that financial markets and the prices of financial assets are driven by humans. Before an important holiday, you can often see a sharp decline in trading activity and, thus, in volatility and momentum levels as well as financial players reduce their trading volume.
The same often holds true for weekends and pre-weekend activity. You can rarely see large moves during late Friday trading hours.
A common behavior, especially after extended trending moves, is that you see may see counter trend movements going into late Friday trading hours as investors take profits and close some of their trades.
There is a substantial risk of loss in futures and forex trading. Past performance is not indicative of future results.
