After a trader has become comfortable with trading the Asian session, and then the London session – they are prepared to trade in the US Session, offering liquidity from 8:00 AM ET to 5:00 PM ET.
The reason for this is the overlap that takes place when London and the United States are both furnishing liquidity to the FX Market. Because of this, many traders consider this to be ‘The Most Liquid Period of the Day’ in the FX Market. During this period (until 11AM ET), the US Session could trade very much like the London Session.
Later in the day (from 2PM ET), the US Session could trade with characteristics very similar to those found in the Asian session. In this article, we will discuss both of these ‘flavors’ that the US session may take on, and how traders can look to build strategies for each.
Trading the US Session
Trading the Overlap
The ‘overlap’ is when the London and US sessions literally overlap each other. These are the two largest market centers in the world, and during this 3 hour period of time – banks on both sides of the Atlantic are furnishing prices. The onslaught of liquidity being offered from these market centers can entail large and fast moves.
As this additional liquidity comes into the market, it can increase volatility. In the article ‘Here is How to Trade Forex Majors like EURUSD during Active Hours,’ DailyFX Quantitative Strategist David Rodriguez looked at the average hourly move of the most common currency pair in the world, EURUSD.
David’s findings confirm the fact that this additional liquidity can increase volatility. In the chart below, notice that the average hourly moves are highest during the highlighted period between 8-11 AM ET.
‘Traders can look to use this volatility to their advantage by trading breakouts. When trading breakouts, traders are looking for volatile moves that may continue for an extended period of time. This way, when they are wrong, they can cut their losses short. When they are right, they can maximize their gains.’
The primary aspect of trading a breakout is an aggressive risk-to-reward ratio in which the trader risks a smaller portion than they are looking to gain if they are right. Risk management is often the most important part of a breakout strategy.
Once a trader has properly addressed risk management, the entry into the trade can be staged with any relevant mechanism of support and/or resistance.
Trading the later-portionof the US Session
As London closes for the day, volatility will have a tendency to decrease drastically. From the same chart we looked at above, we can see a markedly different tone in the average hourly move for the later portion of the US session:
As you can see, the average hourly move on EURUSD during the tested period was similar to that seen during the Asian session.
We investigated the Asian session in much more detail in ‘Trading Tokyo.’ In the article, we incorporated the logic shared in the Traits of Successful Traders installment: ‘When is the Best Time to Trade Forex,’ by David Rodriguez.
That logic dictates that since average hourly moves are smaller and because support and resistance will have a tendency to hold more often than be broken – traders are often benefited by trading and executing range-based strategies.
When trading ranges, traders are looking to ‘buy low,’ and ‘sell high,’ with the anticipation of support and resistance holding.
As we investigated in ‘How to Analyze and Trade Ranges with Price Action,’ traders can execute this brand of strategy without any indicators at all. Or traders can incorporate any brand of support and resistance to stage a range-trading approach.
by James Stanley, Currency Strategist
