07 November 2023
The Forex market is open for 24 hours from Monday to Friday before it closes for weekends. That is 120 hours of trading time every single week. So for any trader looking for a payout, there is plenty of time to look for opportunities.
However, there is an obvious question: Do days matter in Forex trading? Theoretically, all traders can make money anytime. However, when it comes to volume and opportunities, not all days are the same.
Every experienced trader and financial expert has his or her own opinion on the subject and they tend to disagree with each other. So perhaps it will be much better to take a look at the objective data instead
In order to get a clearer picture, let us take a look at the number of contracts of EUR/USD trades. Taking one individual week as an example can be misleading since some events and announcements might disrupt normal trading patterns. Therefore, taking the average of the last 11 weeks can be more informative.
January, February, and March, might not be the best months to trade Forex, but analyzing this period might give us some idea of the overall picture.
As we can see from this chart, on average, Monday has the least amount of trades, then as the week progresses the volume rises steadily, until reaching its peak on Friday.
Best and Worst Days to Trade Forex
There are some eventful times when Mondays have higher volumes, however, on average the number of trading contracts is lower, compared to other days. For example, during the period between January, 5th to March, 20th, 2000, the average volume on the first day of the week was 17% less, compared to Friday.
So how can we explain this? Are Mondays the worst days for Forex trading? Well, there are several observations we can make:
- Mondays have the lowest volume so momentum is weaker
- During the following business days, the number of trading contract increases
- Fridays have the highest volume so momentum is stronger
In the early morning, the volatility is low, there are very few economic data releases, therefore many Asian and European traders are hesitant to enter the trades before the directions of the market could become clearer.
There are hardly any economic numbers released on weekends, however, some important political events can still take place. Since the market is closed by that time, it is impossible to see how the Forex market is responding to those developments.
Obviously, the trader’s response to those events will start manifesting itself from Monday. In times of relatively low volume, this can lead to very unpredictable moves.
This is why so many experienced traders do not usually place as many trades on Monday, as on other days. This does not mean that that will always be the case. If there is some major announcement or unexpected news, the market is not going to wait for another day. Sometimes Monday traders can be more crowded.
Trying to Identify the Trend
Under normal circ*mstances, for most traders identifying trading opportunities becomes easier. There are 24 hours of recent market performance to analyze, some trends and biases become clearer and the volume is higher.
It is also notable that quite often on this day Eurozone inflation date is announced. Sometimes it is about individual member states, but also frequently it can be about the entire Currency Block.
Now, why is this important? The ECB has only one mandate, the main aim being to keep inflation lower, but close to 2%. Unlike the Federal Reserve, it has no target for unemployment.
Therefore, Eurozone inflation data can be helpful, when working with EUR based pairs. If the HICP (Harmonized Index for Consumer prices) is falling below 1.5% or 1%, then this might lead to further easing from ECB and consequently put pressure on a single currency.
Carry Trade Effect
This is the day when the influence of the carry trades comes into the play. Obviously, not all central Banks set the same rate, some of them have higher-yielding currencies.
From 2001 to the 2008 financial crisis this strategy has proven very profitable. During most of this period, the Bank of Japan kept rates near 0.1%, when at the same time the Reserve Bank of Australia, kept the cash rate between 4.25% to 7.25% range.
Subsequently, those traders who placed long positions on AUD/JPY profited from those differentials and earned interest on daily bases.
Now, earning a 4% to 7% return on investment is helpful, it is like having a high yielding savings account. However, from a trading perspective, that may not seem that impressive.
However, we need to keep in mind that this is a leveraged investment. Suppose a trader has placed $10,000 on his Forex account. Even if he or she uses 1:20 leverage, that $100,000 AUD/JPY position could earn him $27.41 a day, which is $834 per month. Clearly, carry trades do have some risk, especially in times of crisis, but some traders still use it.
What does this have to do with Wednesdays? Well, the income from interest rate differentials is calculated for every single business day. However, on Wednesdays, the triple rollover is given, in order to account for Saturday and Sunday.
So returning to our earlier example the trader would earn $82.23 for holding a long AUD/JPY position, than the usual $27.41.
The net effect of this factor is that traders who opened such positions where they profit from interest rate differentials might prefer to hold on to them, to earn extra income.
The opposite is also true if the same trader had a short AUD/JPY position by that time, he would be charged with $82.23. So as we can see there is very little incentive to hold on to that.
This factor makes Wednesday trades slightly more predictable and might be helpful to many traders. That is why some people consider this the best day to trade Forex, or at least one of them.
It is also worth keeping in mind that most of the time the US Federal Reserve announces it’s monetary policy meeting outcomes on Wednesdays. With expected policy and rate changes, that can make the market more volatile.
Central Bank Announcements
Thursdays can be important for EUR and GBP pairs. ECB and Bank of England hold their governing council meetings on Thursdays. This can make EUR/JPY, GBP/USD, GBP/JPY, and other pairs much more volatile.
When it comes to placing trades after the central bank announcements, it is worth keeping in mind, that the market always tries to guess the outcome beforehand.
There is one strange phenomenon, which confuses many traders. Conventional wisdom tells us that when the Central Bank cuts its key interest rate or announces QE, then the currency it issues might fall.
However, we have seen many examples, when ECB was widely expected to reduce rate, but when the announcement was made, instead of collapse, Euro stayed stable or even appreciated
This shows us that the interest rate cut was already priced in beforehand, so the actual decision did not make as much difference.
Closing the Trades
As we have seen on average EUR/USD trades reach the highest volume by Friday, so there should be a number of good trading opportunities.
However, it is also useful to consider that many traders, because of approaching weekends, try to close their positions. So under this scenario, profit-taking can become a major factor.
Therefore, trading on Friday can become riskier. The trader might correctly identify the trend on Tuesday and open several positions. However, during the last business day of the week, the market turns to the profit-taking mode, this can lead to reversals.
All of those reasons above might suggest that this is not the best time to trade Forex.
Non-Farm Payroll (NFP) number, one of the most essential measures of employment in the US is usually released on Fridays. As the name suggests, this indicator excludes the entire agricultural sector, which is more seasonal, than the other parts of the economy. This announcement also encourages greater volatility, especially in USD based currency pairs.
Finally, finding the best days and times to trade Forex is most important for short term day traders. Let us not forget that there are many long term traders and investors. So if there is some serious undervalued opportunity in the markets, then the choice of the weekday to execute the trade, might not be as important as in the previous case.
Good Days for FX trading - Key Takeaways
- As we have discovered in this guide to the best Forex tradingtimes, events and economic data can disturb the typical pattern of trading volumes, however, over the longer-term Mondays are less volatile than the other days. Thursdays and Fridays usually have the highest number of traded contracts, with Tuesdays and Wednesdays in between.
- In most cases, Tuesdays, Wednesdays, and Thursdays can be slightly less risky for traders. However, traders should not always shy away from trading on Mondays and Fridays if a good opportunity presents itself. So it is not always so simple to determine the best days for Forex trading.
- For the long term trading, weekday patterns are not as important as for the short term. They mostly operate from a large time frame perspective. Consequently, finding some undervalued bargains are more essential for them, for a day trader.
FAQ - Best Days to Trade Forex
Is trading during a low volume riskier?
In order to answer this question, it is important to realize that a low volume does not always necessarily translate into low volatility. This helps to keep in mind to decide when to trade Forex.
To illustrate this, let us take a look at the GBP/USD historical data, for example. During March 9th, 2020 the pound gained 72 pips against the dollar. However, the British currency collapsed in the following 4 days, losing 845 pips in total.
As we can see, the main problem with low volume is that the market sentiment is unclear and it is very easy to misjudge the situation. In the previous example, many traders who opened the long GBP/USD position lost a considerable amount of money in the following days. In fact, without a stop-loss order, their entire position would have been wiped out.
If a trader waited for a day and assessed the situation on Tuesday, then it would be clear that a new trend was developing against the pound and therefore having a long GBP/USD position would not make any sense.
How should the traders deal with days with risk events?
The CPI, unemployment, NFP releases, and central Bank rate decisions are frequently called ‘risk-events’ because usually, they lead to a spike in volatility.
Major central bank announcements can easily be followed by 100 to 300 pip change in a relevant currency pair. This creates many opportunities for profit, but how can a trader respond to that?
Actually, trading the key interest rate changes might not be as straightforward as it seems. Let us suppose that it is widely expected that the ECB would cut rates, major financial experts predict this, and market sentiment is the same.
However, simply opening the long positions before the announcement might not always be the best idea. This expectation might always be priced into the market and even if ECB does this, Euro might appreciate it. Traders might expect more QE or larger cuts, but be disappointed.
Misreading this situation can easily lead to some massive losses. This might not be the best time of day to trade Forex.
So it is much easier to wait for a while, as the smoke clears after the announcement and then judging by the reaction by the market, place trades afterward.
Why are carry trades popular for some traders?
This is a more popular trading strategy with long term traders. The Federal Funds rate is back to 0% to 0.25% range. Even 6 months ago, the depositor could earn as much as 2% on online bank CDs and Savings accounts. However, as a response to the FED decision, even those institutions started lowering their rates.
So instead of placing their money on 0.1% accounts, many people will look for more profitable alternatives. Besides Dividend Stocks and Rental Properties, carry trades might be another vehicle for income investments. As we have seen before the 2008 crisis traders could earn as much as 4% per month with 1:20 leverage.
The problem with carry trades this time is that there are not many options. The Reserve Bank of Australia has cut rates dramatically, lowering it to 0.25%. New Zealand’s central bank maintains the rates at the same level. The Bank of Canada keeps its benchmark at 0.75%. Therefore, the best time to trade Forex in Australia, New Zealand, and Canada vary drastically.
The Russian Ruble and Turkish Lira do have higher yields, but those currencies are much riskier, with a long history of devaluations, so it is not likely that they would attract the carry traders.
How often do currency trends change during the middle of the week?
We have already discussed the dramatic trend change in the GBP/USD pair during the middle of the week, however, do we see such a scenario often?
Looking at the price history of the USD/JPY currency pair, we can see that during the last 3 out of 9 weeks, the trend which developed on Monday stayed mostly intact. At the same time, in the remain 6 weeks, there were major reversals.
So in two-thirds of those cases, the trader would have lost money if he or she simply followed the trend and has not adapted to the market changes.
Do the emerging market currencies have a different trading pattern during the weekdays?
Here it is helpful to keep in mind that most of the traders consider Emerging Market currencies as riskier propositions. This is because of two reasons: firstly, those currency traders can be very one-sided. One example of this is Turkish Lira, USD/TRY as recently in 2013 traded at 1.80, nowadays the rate is hovering around 6.40.
Such a dramatic one-sided change is quite uncommon for such currency pairs as EUR/USD or USD/JPY.
Another reason has to do with large inflations differentials. For example, the US and the UK roughly have similar inflationary dynamics, so the relative processing parity remains more or less stable.
This is one of the factors which could explain the one-sided direction of USD/TRY trend. Constantly higher inflation in Turkey turns the relative purchasing power in favor of USD. Hence this large trend of lira depreciation.
That is why many traders prefer to close their emerging market currency by Friday. In this way, they can reduce the potential exposure to those risks either by taking profit or limiting the losses.
