U.S. SESSION (NEW YORK): 8 A.M.–5 P.M. EST

New York is the second largest FX marketplace, encompassing 19 percent
of total FX market volume turnover according to the 2004 Triennial Central
Bank Survey of Foreign Exchange and Derivatives Market Activity in
April 2004, published by the Bank for International Settlements (BIS). It is
also the financial center that guards the back door of the world’s FX market
as trading activity usually winds down to a minimum from its afternoon
session until the opening of the Tokyo market the next day. The
majority of the transactions during the U.S. session are executed between
8 a.m. and noon, a period with high liquidity because European traders are
still in the market.
For the more risk-tolerant traders, GBP/USD, USD/CHF, GBP/JPY,
and GBP/CHF are good choices for day traders since the daily ranges average
about 120 pips. (See Figure 5.2.) Trading activities in these currency
66 DAY TRADING THE CURRENCY MARKET
FIGURE 5.2 U.S. Session Volatility
pairs are particularly active because these transactions directly involve
the U.S. dollar. When the U.S. equity and bond markets are open during
the U.S. session, foreign investors have to convert their domestic currency,
such as the Japanese yen, the euro, and the Swiss franc, into dollardominated
assets in order to carry out their transactions. With the market
overlap, GBP/JPY and GBP/CHF have the widest daily ranges.
Most currencies in the FX market are quoted with the U.S. dollar as
the base and primarily traded against it before translating into other
currencies. In the GBP/JPY case, for a British pound to be converted
into Japanese yen, it has to be traded against the dollar first, then into
yen. Therefore, a GBP/JPY trade involves two different currency transactions,
GBP/USD and USD/JPY, and its volatility is ultimately determined
by the correlations of the two derived currency pairs. Since
GBP/USD and USD/JPY have negative correlations, which means their
direction of movements are opposite to each other, the volatility of
GBP/JPY is thus amplified. USD/CHF movement can also be explained
similarly but has a greater intensity. Trading currency pairs with high
volatility can be very lucrative, but it is also important to bear in mind
that the risk involved is very high as well. Traders should continuously
revise their strategies in response to market conditions because abrupt
movements in exchange rates can easily stop out their trading orders or
nullify their long-term strategies.
For the more risk-averse traders, USD/JPY, EUR/USD, and USD/CAD
appear to be good choices since these pairs offer traders a decent
amount of trading range to garner handsome profits with a smaller
amount of risk. Their highly liquid nature allows an investor to secure
profits or cut losses promptly and efficiently. The modest volatility of
these pairs also provides a favorable environment for traders who want
to pursue long-term strategies.