Currency Trading For Dummies. Kathleen Brooks

From a trading perspective, liquidity is a critical consideration because it determines how quickly prices move between trades and over time. A highly liquid market like forex can see large trading volumes transacted with relatively minor price changes. An illiquid, or thin, market tends to see prices move more rapidly on relatively lower trading volumes. A market that only trades during certain hours (futures contracts, for example) also represents a less liquid, thinner market.

      

We refer to liquidity, liquidity considerations, and market interest throughout this book because they’re among the most important factors affecting how prices move, or price action.

      

It’s important to understand that, although the forex market offers exceptionally high liquidity on an overall basis, liquidity levels vary throughout the trading day and across various currency pairs. For individual traders, though, variations in liquidity are more of a strategic consideration rather than a tactical issue. For example, if a large hedge fund needs to make a trade worth several hundred million dollars, it needs to be concerned about the tactical levels of liquidity, such as how much its trade is likely to move market prices depending on when the trade is executed. For individuals, who generally trade in smaller sizes, the amounts aren’t an issue, but the strategic levels of liquidity are an important factor in the timing of when and how prices are likely to move.

In the next section, we examine how liquidity and market interest changes throughout the global trading day with an eye to what it means for trading in particular currency pairs. (We look at individual currency pairs in greater detail in Chapters 8 and 9.)

Around the World in a Trading Day

      The forex market is open and active 24 hours a day from the start of business hours on Monday morning in the Asia-Pacific time zone straight through to the Friday close of business hours in New York. At any given moment, depending on the time zone, dozens of global financial centers — such as Sydney, Tokyo, or London — are open, and currency trading desks in those financial centers are active in the market.

      In addition to the major global financial centers, many financial institutions operate 24-hour-a-day currency trading desks, providing an ever-present source of market interest.

      

Currency trading doesn’t even stop for holidays when other financial markets, like stocks or futures exchanges, may be closed. Even though it’s a holiday in Japan, for example, Sydney, Singapore, and Hong Kong may still be open. It may be the Fourth of July in the United States, but if it’s a business day, Tokyo, London, Toronto, and other financial centers will still be trading currencies. About the only holiday in common around the world is New Year’s Day, and even that depends on what day of the week it falls on.

      The opening of the trading week

      There is no officially designated starting time to the trading day or week, but for all intents the market action kicks off when Wellington, New Zealand, the first financial center west of the international dateline, opens on Monday morning local time. Depending on whether daylight saving time is in effect in your own time zone, it roughly corresponds to early Sunday afternoon in North America, Sunday evening in Europe, and very early Monday morning in Asia.

The Sunday open represents the starting point where currency markets resume trading after the Friday close of trading in North America (5 p.m. eastern time [ET]). This is the first chance for the forex market to react to news and events that may have happened over the weekend. Prices may have closed New York trading at one level, but depending on the circumstances, they may start trading at different levels at the Sunday open. The risk that currency prices open at different levels on Sunday versus their close on Friday is referred to as the weekend gap risk or the Sunday open gap risk. A gap is a change in price levels where no prices are tradable in between.

      

As a strategic trading consideration, individual traders need to be aware of the weekend gap risk and know what events are scheduled over the weekend. There’s no fixed set of potential events, and there’s never any way of ruling out what may transpire, such as a terror attack, a geopolitical conflict, or a natural disaster. You just need to be aware that the risk exists and factor it into your trading strategy.

      Of typical scheduled weekend events, the most common are quarterly Group of Twenty (G20) meetings (see Chapter 3 for more on the G20) and national elections or referenda. Just be sure you’re aware of any major events that are scheduled. During the height of the Eurozone sovereign debt crisis, a lot of last-minute bailout decisions were made over the course of a weekend, which had major implications for the markets when they opened.

      On most Sunday opens, prices generally pick up where they left off on Friday afternoon. The opening price spreads in the interbank market are much wider than normal, because only Wellington and 24-hour trading desks are active at the time. Opening price spreads of 10 to 30 points in the major currency pairs are not uncommon in the initial hours of trading. When banks in Sydney, Australia, and early Asian centers enter the market over the next few hours, liquidity begins to improve and price spreads begin to narrow to more normal levels.

      

Because of the wider price spreads in the initial hours of the Sunday open, most online trading platforms do not begin trading until 5 p.m. ET on Sundays, when sufficient liquidity enables the platforms to offer their normal price quotes. Make sure you’re aware of your broker’s trading policies with regard to the Sunday open, especially in terms of order executions.

      Trading in the Asia-Pacific session

      Currency trading volumes in the Asia-Pacific session account for about 20 percent of total daily global volume, according to the 2019 triennial BIS survey. (BIS, by the way, is the Bank for International Settlements, and the survey can be found at www.bis.org.) The principal financial trading centers are Wellington, New Zealand; Sydney, Australia; Tokyo, Japan; Hong Kong; and Singapore. (A session is a trading period, or trading hours, for a given global region. There are three sessions, or sets of trading periods/hours: Asia-Pacific, European, and North American.)

News and data reports from New Zealand, Australia, and Japan hit the market during this session. New Zealand and Australian data reports are typically released in the early morning local time, which corresponds to early evening hours in North America. Japanese data is typically released just before 9 a.m. Tokyo time, which equates to roughly 7 or 8 p.m. ET. Some Japanese data reports and events also take place in the Tokyo afternoon, which equates to roughly midnight to 4 a.m. ET.

      The overall trading direction for the NZD, AUD, and JPY can be set for the entire session depending on what news and data reports are released and what they indicate.

      In addition, news from China, such as economic data, interest rate changes, and official comments or currency policy adjustments, may also be released. Occasionally as well, late speakers from the United States, such as Federal Reserve officials speaking on the West Coast of the United States, may offer remarks on the U.S. economy or the direction of U.S. interest rates that affect the value of the U.S. dollar against other major currencies.

      

Because of the size of the Japanese