Liquidity by Pair and Hour: A Map of Where Trading Is Cheapest

[Fairman]

Liquidity by Pair and Hour: A Map of Where Trading Is Cheapest

Liquidity is not uniform across pairs and times. A rough map helps you choose when and what to trade.

Major pairs have the deepest liquidity, and it peaks when their home markets are open. EUR/USD and GBP/USD are most liquid during the London session and the London-New York overlap. USD/JPY has strong liquidity during Tokyo and New York hours. AUD/USD and NZD/USD are most active in the Asia-Pacific session and during London.

Crosses are liquid when both home markets are open. EUR/GBP is best traded in London hours. EUR/JPY has two active windows, Tokyo and London.

Exotics are generally thin, with liquidity concentrated in their regional hours. USD/ZAR is more liquid during London hours, and USD/MXN during North American hours.

Time of day matters for spreads, as discussed earlier. Within each pair, spreads tend to be narrowest in the busiest hours and widen at rollover and in the late New York to early Asia period.

You can measure this. Record spreads by hour for your pairs over several days, and build a simple table.

The practical use is to match your trading hours and pairs to periods of low cost and good liquidity, such as trading EUR/USD in London, and yen pairs in Tokyo or the overlap.

Liquidity shifts also with holidays and daylight saving changes.

Practical step: build a table of average spreads by hour for two pairs, and identify your cheapest window for each.

[Fairman]

Building the spread table is tedious for a few days, but it pays back fast. Once you know the cheap window for each pair, you stop trading the expensive hours by accident. The easiest way is to note the spread on each of your pairs every hour you're at the screen, or use an indicator that logs it automatically. After a week you'll usually see the same shape: tight in London and the New York overlap, wider in late New York, worst around rollover. Some pairs surprise you though. A cross you thought was fine may be twice as expensive at the time you normally trade it, and that changes whether short targets make sense.

[Fairman]

For anyone on Lagos time, the London and New York overlap lands in the afternoon, which is handy if you work mornings. That's usually where the majors are cheapest to trade. While the US and UK are on summer time, it runs from about 1pm to 5pm our time. In winter it shifts an hour later. The catch is that a lot of US data drops at the start of that window, around 1:30pm, so the first part can be messy. If you trade the overlap, check the calendar and decide whether you want to be in before the release, or wait until the first reaction has settled and the spread is back to normal.

[Fairman]

The late New York into early Asia gap is the one I avoid on everything. Spreads widen, nothing much moves, and any fill you get there is usually a bad one. From Lagos that's roughly 10pm to midnight, around the daily rollover. A limit order sitting near price can get filled on a spread spike that never really traded, and stops close to price can get hit the same way. If I have a position open overnight, I keep the stop well away from current price, enough to survive a widened spread. And I don't set new pending orders during that window. They can wait until the morning when conditions are normal.