Strategies and Risk Management Techniques for Trading in Europe

Strategies and Risk Management Techniques for Trading in Europe

What is the Forex market?

Let's start by defining what the Forex market is. The Forex market is a part of the global financial market where currencies are traded. The Forex market has the largest turnover among financial markets. Currencies in the market are traded in pairs, meaning you get one currency by selling another of the pair. There is a base currency and a quote currency in the pair. The base is usually recorded first and is usually more valuable, and the quote is the second and, accordingly, less valuable. The concept of the exchange rate of a currency pair is equal to the amount of the currency quote needed to buy a unit of the base currency. For example, the exchange rate of the EUR/USD currency pair will equal the number of US dollars needed to buy one euro.

Traders earn income from market fluctuations that change exchange rates. And the goal of the trader is to buy the stock at a lower price and sell it at a higher price, and the difference is the earnings.

The Forex market is 24 hours a day because it consists of four main sessions. When one session ends, another opens. The main market sessions are the Asian session (from 11 pm to 8 am GMT); the European session (from 7 am to 4 pm); the American trading session (from 1 pm to 10 pm), and the Pacific session (from 10 pm to 7 am). Also, these trading sessions overlap at the beginning and end of their work.

What affects the Forex market?

Market fluctuations are influenced by a fairly wide range of factors, both internal and external.

One of the most important factors is the interest rate. Central banks can raise or lower the interest rate, which directly affects the attractiveness of the country to foreign investors. An increase in the interest rate dilutes the flow of foreign investments, which in turn strengthens the national currency and its rate increases. The rate affects not only the exchange rate but also the level of inflation, unemployment, etc. An increase in the rate can lead to an increase in the level of unemployment because the loan interest will increase (including for businesses). Therefore, another factor affecting the market is the general economic condition of the countries.

Resource prices can move the market because the economies of some countries are based on the sale of resources, so an increase in the price of certain resources will strengthen the currency, and a fall will weaken it. For example, the exchange rate of the Canadian dollar will fluctuate depending on fluctuations in crude oil prices.

The Forex market is largely influenced by the balance of exports and imports of countries. If exports exceed imports, this indicates that there is a demand for the country's products. This means that the country receives foreign money flows, which in turn strengthens the currency.

The political situation in the country and its relations with other countries can significantly affect the exchange rate. After all, the coming of a new political force to power can also change economic policy and influence economic indicators.

Also, international conflicts can lead to the imposition of sanctions on countries, which will most likely weaken the exchange rate. And, of course, the market is affected by fluctuations in the supply and demand of the currency, so the big players in the market can drastically change the situation in the market.

Peculiarities of trading sessions on the Forex market

Each trading session has its own characteristics. Let's consider them in more detail.

The European session is also called the London session. The European session is considered to be the most active because it is during the working hours of the European session that the largest number of transactions are conducted. The London session accounts for approximately 35% of the total turnover of the Forex market. In the beginning, the London session overlaps with the Tokyo session. The Asian session is relatively calm, so when the London session begins, the European exchanges open, and volatility increases rapidly. This increases the risks because currency rates change a lot in a short period of time. But at the same time, high volatility increases potential profit.

In the end, the European session intersects with the American one. During this period (which lasts four hours), there is very high liquidity in the market during this period.

The major pairs are very popular during this session and trade in extreme volumes, so the pairs trade with the lowest spreads.

The American Forex session is the second in volume of working capital after the European Forex session. The beginning of the American session coincides with the end of the London session. The market situation is affected by the work of American banks and stock exchanges. The New York session is considered the most aggressive of all. The session is heavily influenced by the release of news, so price changes can be quite significant and chaotic.

The most profitable for trading during the American session are currency pairs that include not only the US dollar but also the Canadian dollar, as well as the euro and the British pound. The greatest volatility during this session is observed with the closing of European banks. On Friday evenings, activity on the market decreases.

The Asian Forex session is smaller in terms of trade volume compared to the European or American one. Its beginning coincides with the end of the Pacific Forex session. The country that most influences the session is Japan. At the beginning of the session, all economic reports and statistics in this country are released. The most popular pairs to trade during this Forex session are those that include the Japanese yen, the Australian dollar, and the New Zealand dollar. But as during every Forex session, the most popular pair remains EUR/USD.

Unlike the European or American trading session, the Tokyo Forex session usually offers traders low liquidity because the trading volume is smaller. During the Tokyo session, there are usually no strong fluctuations, and the market is considered moderately volatile.

The Pacific Forex session is the smallest in terms of trading volume among all major sessions. The Sydney session is the least active, so it is considered the best period for newbies to have an opportunity to learn because of the risks of sharp jumps in the exchange rate. So the volatility during this trading session is quite low. Due to the low trade volumes, this session offers low liquidity. The most popular pairs to trade during the Sydney session are those that include the Australian dollar, the New Zealand dollar, and the Japanese yen.

The best currency pairs to trade during the European trading session

During the London trading session, banks all over Europe start their work. Accordingly, the national currencies of European countries in the European Union are becoming more traded. The largest price movement occurs after the opening of the London session. So volatility is greatest in pairs that include the British pound, the Swiss franc, and the euro. List of pairs that are most popular during this session:

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • USD/CHF
  • EUR/JPY
  • GBP/JPY

The best strategies for the European Forex session

It is believed that the best strategy to use during the European Forex session is the breakout strategy. Following the name, traders wait for the moment when the price of a certain currency breaks through its part. That is, traders are waiting for a strong impulse that will give them a signal to enter the deal. Frequency traders use trailing order tools such as stop and limit orders to determine when to close a trade.

Traders place stop orders below the previous support level (this is the price level at which the value of the currency temporarily stops and cannot overcome it) or above the support level (the support level, this is the opposite of the equal support value. It is at this level that prices are supported by buyers).

Conclusions

So the London Forex session offers great opportunities for profit. Experienced traders choose this particular session due to high liquidity, low spreads, and market activity. Among the strategies that are appropriate for use is the breakout strategy.

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