The forex is an immense international marketplace, accounting for more than US$5 trillion in average per session traded volume. Everyday participants from around the world trade forex pairs in the hopes of achieving their financial goals.
Due to the fact that currency trading is a truly global pastime, the forex is open for business 24 hours a day, 5 days a week. Although technically operational around the clock, each day features four distinct sessions:
- Pacific Session: Sydney, 9:00 PM to 5:00 AM UTC
- Asian Session: Tokyo, 11:00 PM to 7:00 AM UTC
- European Session: London, 8:00 AM to 4:00 PM UTC
- American Session: New York, 1:00 PM to 9:00 PM UTC
One of the interesting aspects of the currency trade is that it knows no borders or timezones. Subsequently, there are three periods where regional market hours overlap:
- European-American Session: 12:00 PM to 4:00 PM UTC
- Asian-European Session: 7:00 AM to 8:00 AM UTC
- Australian-Asian Session: 11:00 PM to 6:00 AM UTC
Each forex session and subsequent overlapping period presents a unique collection of market conditions. Participation levels fluctuate, which influences market liquidity and volatility. One of the more nuanced periods of the currency trading day is the forex twilight hours.
What Are Forex Twilight Trading Hours?
It is important to remember that even though a market may be technically open for business, not all participants are actively engaged. Liquidity providers of all types are often in transit, and they've either concluded the day's work or are preparing for the coming session. The forex twilight is one such time where the market is not operating at normal capacity.
The forex twilight is a one to two-hour period immediately following the New York session close and preceding the Asian session open. During this time, U.S.-based traders are headed home for the day while participants in Tokyo, Singapore and Hong Kong are not yet fully operational. This can have a major impact upon the prevailing market dynamic in two ways:
- Limited Liquidity: During this period, order flow is limited and typically results in lagging traded volumes. This is detrimental to efficient trade, as large buy or sell orders can destabilise markets.
- Chaotic Price Action: Although the forex is the world's deepest market, it is not immune to sudden spikes in volatility. Flash crashes and wild swings in exchange rates have been documented, boosting the risk profile of many currency pairs.
These two elements of the twilight hours make efficiently trading the forex a challenge. Bid/ask spreads are frequently inconsistent and instant rallies or sell-offs enhance risk assumed by the trader. While there are certainly opportunities to profit during this period, the use of stop loss orders and moderate leverage is recommended to avoid financial catastrophe.
Expect The Unexpected During Twilight Hours
Twilight hours are viewed by many professionals as being an especially risky time to hold open forex positions. In addition to abnormal order flow and thin market depth, extreme swings in pricing have been documented. The following are a few instances where the twilight hours have brought enhanced volatility to a variety of currency pairs:
- 12 February 2019: The Swiss franc (CHF) fell sharply and unexpectedly against the majors. Within a one-hour period, the USD/CHF rallied to a session high of 1.0095 before retreating to a session low of 0.9991. The extreme volatility was attributed to limited liquidity in the Asian markets due to Japan's observation of National Foundation Day.
- 3 January 2019: News of weak Chinese sales from Apple Inc. was credited as being the primary catalyst for a sell-off in the United States dollar (USD). A crash in the USD/JPY from ¥108.88 to ¥104.79 took place around 5:30 PM EST before a significant rebound occurred.
- 3 January 2019: The volatility of 3 January was not limited to the USD/JPY, as evidenced by a violent loss in the Australian dollar (AUD) against the USD. In a matter of seconds, the AUD/USD fell from just beneath .7000 to .6743 amid heavy selling.
- 7 October 2016: Amid the supercharged post-Brexit referendum environment, the GBP/USD plunged more than 6% in minutes during the pre-Asian open. Prompted by comments regarding a hard Brexit from U.K. leadership, the GBP fell to 31-year lows against the USD.
The proliferation of trade-related technologies has made it possible for large orders to be executed at market with lightning fast speed. Times of limited liquidity, as found during the forex twilight, can lead to dramatic swings in pricing and flash crashes.
Steps have been taken at the institutional level to limit the impact of news releases and block orders during the forex twilight. Corporate earnings announcements are frequently held until business is underway in Asia and brokers regularly divide large orders into smaller increments for execution during the forex twilight. While these practices certainly promote market stability during this fragile time, unexpected volatilities still arise due to the limited depth-of-market.
Whether one is implementing short-term trading strategies or longer-term approaches, understanding how time influences the forex is a necessity. Participation rates vary throughout the session, influencing market liquidity. In order to avoid being caught up in a flash-crash or extreme periodic volatility, it is important to be aware of the risks associated with the forex twilight hours.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…