When experienced stock market speculators attempt to apply their battle-tested systems on Forex pairs, they often suffer the same setbacks as aspiring traders. Why is this? What makes the Forex market so different from stocks, bonds, or indices?
One key difference is that the Forex market trades continuously, 24 hours a day, five days a week. International commerce does not take time off, nor does Forex. This continuous action makes it difficult for new participants to adjust to, and even strategies that worked in other markets need to be "tweaked" in order to successfully tackle FX.
Everything is relative in FX; a trader’s open in Tokyo is quite different to the open in London or New York. And with no central clearing hub, the actual prices can differ slightly. So, without exchange-mandated hours, how can traders break down the 24-hour cycle?
Enter the session map.
Pepperstone session map – MT4.
Trading Different Money Centres
A clever way to manage the 24-hour action in Forex is to break down each day into "sessions".
1. The Asia/Pacific Session: the majority of turnover in this timezone is done in Sydney, Tokyo, Hong Kong and Singapore. Typically there will be exporters and regional central banks active in this session. However, the liquidity is nowhere near as deep as it is during London or New York, and as such the price action is not usually as interesting as it is during the other sessions. The Asia session does have it’s moments thought: when there is regional data (Aud or Nz unemployment, Jpn Tankan, Central Bank meetings) you can bet on strong directional moves. But most of the time, this session is range-bound and consolidates whatever New York did.
Typical Asia/Pac action on AUDUSD: range bound action that inspires range-trading strategies.
2. The London Session: this is still the most important session of the day, for geographical reasons above all else. Along with London, other European financial centers are active: Frankfurt, Geneva, Paris, and that’s why large corporate flows or M&A activity take place during this session and contribute to the deep liquidity that London benefits from. This deep liquidity means that the price action seen during the London session is quite important and gives good insight into the market sentiment and positioning.
Typical London session action: breakouts and range expansion on AUDUSD that inspires range-breakout strategies.
3. The New York Session: the Forex market experiences it’s peak in turnover as London passes the baton onto New York. However, whereas the London session tends to be a trendy session, New York has much more volatility and chop so the trading strategies to deploy change significantly. Further more, after 12 PM in New York, liquidity starts to dry up quickly.
As retail traders, we don’t have to worry about execution. Pepperstone acts as a broker to multiple market makers or counterparties. Each counterpart sends a price to Pepperstone, as well as a particular amount of volume that a quote is "good" for, and then Pepperstone distributes that price to traders. In this system, spreads are determined by the difference between the best bid and the best offer at a particular point in time. It is a very efficient system and allows traders to benefit from tight spreads even in low-liquidity environments.
Going back to the session map, the primary goal is to help traders visualise clearly which session is currently operational. But that’s not all.
FX majors’ performance during the Tokyo session – Pepperstone MT4.
In order to maximise value in FX, it’s often useful to identify strength and weakness in currency pairs. Rather than attempting to fade strong pairs and buy weak pairs, it’s usually a better bet to buy strong pairs and sell weak pairs.
The session map allows traders to easily spot strength and weakness during a session, and to notice particular patterns that can be useful to identify market sentiment.
- Are all the majors trending in the same direction? Perhaps the American Dollar is pulling everything in the same direction; or maybe risk-appetite is driving high-yield currencies higher (or lower).
- Is it a USD-dynamic, with EurUsd, GbpUsd, AudUsd, and NzdUsd going one way and USDCAD and USDCHF going the other way?
- Is it a comm-doll day, with big moves in AUDUSD, NZDUSD, and USDCAD?
The session map can help you establish this easily.
FX majors’ performance during the London session – Pepperstone MT4.
The 8-Hour Pivot
Just like the classic daily pivots help establish useful reaction points for any given day, a rolling 8-hour pivot can help determine reaction points (along with the balance of power) on any given session.
USDJPY 5 min chart with 8-hour rolling pivot overlay.
In the chart above, it’s clear how we open the new trading day during Asia, well below the Asia session pivot. Sellers are in command and price continues to trend during London, albeit pulling back to the London session pivot right near the end of the London session. Sellers emerge at the pivot, and price is pushed back down during the New York session to the London session lows. Price then bounces once more, retraces up to the New York pivot, but once again finds sellers as the day ends, and we transition into the next day’s Asia session.
Such is the usefulness of "mapping" the three main sessions of each 24-hour period. The 8-hour pivot, in practice, is a useful way to determine the balance of power, because it initiates at the "start" of each session. Hence, when prices are trading above the pivot, the session is in the black. When prices are trading below the pivot, the session is in the red.
One interesting way of trading intra-session is to view each session as a "range" and observe price action around the extremes of the prior session. Is price turning or is it preparing a breakout?
AUDUSD session map. Above the pivot is coloured light green. Below the pivot is coloured light red. Notice how the prior session highs and lows become robust support and resistance points to trade off of.
Over to You
The session map is a very smart solution for short term traders that look to profit from the intraday oscillations of currency pairs. By tracking the strong or weak pairs during any given session, traders can immediately get aboard trending vehicles and track the strength of the intraday move using a rolling 8-hour pivot point.
You can deploy functional intraday strategies by simply tracking the various sessions. Make the most of your intraday trading, understanding this key principle of the Forex Market.