You can trade every day of the working week and around the clock on forex markets. However, just because you have a near unlimited amount of time to enter and exit positions, it does not mean you should adopt an “always-on” trading strategy. There are situations when you need to sit on the sidelines and wait for a better hour or day.
Selecting one of the most trusted forex brokers will make it easier for you to execute trades at the right time, but being aware of the following factors will help you to decide when you should also take a step back from certain markets.
There are ten days each year that the Federal Reserve System shuts down and does not process market orders. Overall, trading volume on these days falls significantly, as does liquidity and the predictability of currency price moves. For this reason, it is a wise strategy to steer clear of trading pairs on Federal Holidays.
The US dollar accounts for more than 85% of all currency transactions, which means there will be lower levels of liquidity on holiday dates such as Memorial Day (May), Labor Day (September), and Thanksgiving Day (November). Lower liquidity generally results in traders having to pay higher transaction costs and for wider spreads.
Forex is a global market, so you can look out for holidays in other countries to inform your trading frequency and strategies. For example, bank holidays in the United Kingdom will usually lead to lower trading volumes of GBP. Keeping tabs on a forex calendar will give you all the information you need so you can decide when not to trade currency pairs.
High impact news cycle
The news cycle also has a significant impact on the volatility of forex markets. That is because there are several “high impact” reports released during each month. A recent study found that the most impactful news for forex is central bank meetings, unemployment, consumer price index (CPI), gross domestic product (GDP), and unplanned forex news.
Central bank meetings are the most important by far, especially in the US, causing an average pip movement of 150. These meetings take place every month and in various countries around the world. The Federal Reserve is perhaps the most influential, with its monthly FOMC meeting outlining monetary policy. Traders should always pay close attention to interest rate changes here.
Similar to Federal Holidays, a forex calendar will detail all of the important news events during a month. US reports are released between 8.30-10am EST. Currencies can be volatile after news announcements are released, so you may want to step back and not trade currencies during this time.
Illiquid market hours
Federal holidays are not the only time that liquidity tends to fall in forex. Certain market hours are more conducive to higher transaction costs and other factors that can make it more challenging to turn a profit from your trades. For example, the London and New York sessions, which open at 3am, and 8am EST, respectively, and then close at 11am and 5pm, generally have the highest levels of liquidity as there are more people making trades during those times.
In contrast, specific Asian markets such as Tokyo, which opens at 7pm EST, have fewer market participants and thus lower levels of liquidity. Those with short-term trading styles, such as day trading, should work during standard US trading hours as it is easier to analyze and execute trades.
Situations, where you should not trade, are not always influenced by tangible factors such as news. Your emotional state can also play a role in your trading frequency. If you are suffering from “chart burnout” due to over analyzing the minutiae of currency movements, it may be best to take a step back and sit out of trading for a short while.
Getting frustrated or annoyed after a short losing streak can tilt your emotional state and lead to poor decision making. That can end up losing your money or your entire account. It is normal to go through slumps and difficult periods, and being able to recognize when this is happening is essential. You should not make trades if you feel out of sync or exhausted.
Being successful in forex is more than just making the right trades for currency pairs. You need to know when the market’s liquidity and volatility could negatively impact your portfolio. Sitting out and saving money is just as crucial at maximizing gains during more favorable market conditions.