Based on the financial centers that are opened throughout a trading day, there are different trading sessions that take place. They are not equally important, and this is a valuable information for the forex traders as they can calibrate their expectations. When these financial centers are opened, volatility increases. This means that currency pairs are moving more aggressively. The more important the financial center and the transactions that take place there, the more the currency markets will move. This is what traders are looking for, as speculation is useless if the underlying financial instrument is not moving.
The forex market operates 24-hours a day during the week because there's always a global market open somewhere due to time zone differences. But not every global market actively trades every currency. Therefore, different forex pairs are actively traded at different times of the day. Choosing to trade during a specific session, in turn, has its own rules, characteristics and consequences. One of the most important related factors is the way currency pairs behave during specific trading sessions.
There are three major sessions each day: Asian, London/European, and the U.S. The timing of these is important because the best times to trade are when two of the sessions overlap. The most liquid time is 8 to 11 A.M. EST, which combines the most liquid European markets with those of the United States. You usually get the most participants, and hence strongest price moves and fairest trade execution. However, don’t make the mistake of thinking that each currency trades heaviest in its local time zones. Instead, they trade most heavily in the most liquid markets, during the London and New York sessions.
For traders who are more risk-tolerant, EUR/USD, GBP/USD, USD/CAD, EUR/JPY and GBP/JPY are pairs to consider as most of them have average daily ranges of above 100 pips. Any pairs involving the U.S Dollar are volatile during the New York session, as foreign investors need to exchange their domestic currency for U.S. dollars to participate in the U.S. bond and equity market. As with the London session, GBP/JPY is the most volatile currency pair in the New York session while it overlaps with the London trading hours. Although trading currency pairs with high volatility is lucrative, traders need also to pay attention to the increased risk while doing so.
For the longer-term or fundamental trader, avoiding periods of volatility stemming from session overlaps and economic data releases would be advised and, when considering the risks and volatility associated with the exotics, avoiding them would also be a wise decision. However, the choice of currency pairs for trading purposes is partly a function of trading sessions, and traders should focus more on those currencies that promise higher volatility and liquidity, and avoid those that are comparatively dormant due to passive market conditions.