What is Market Activities and How do we measure them?

I have discussed in my previous posts, the Asian, European and North American sessions, their operating hours, and how they affect price action for the different currency pairs. A currency such as the Japanese Yen would be the most active during its own market. It will see higher volatility on average during the Asian session.

This is simply due to the fact that most of the banks, big businesses and major traders from Japan will use their own domestic currency for foreign exchange transactions and as such the currency Japanese Yen will be more active and volatile during the Asian session. The other reason it is also more difficult for banks, traders to buy or sell a currency from a region where their market is still closed. That is why, you should not really expect the USDCHF pair to be active and volatile during the Asian market.

To explain this further, if a Euro bank would like to make a multi-billion dollar currency exchange for Japanese Yen, it would most likely do so when Asian (Japanese) banks are online and there is a greater pool of liquidity. Otherwise, large orders like this in a thin market (if this is done during the European session) would definitely result in prices moving away from the ideal entry point when the order is processed.

Since a currency is the most active and volatile during its own market, it can therefore lead to another conclusion. The price action is usually greatest when the sessions overlap. When traders, banks and business from two different sessions are online, there are more participants in the market and, therefore, a greater level of liquidity is available. The first sharp rise in price action will generally occurs around the closing hours of the Asian session and opening of the European session at around 0700 GMT.

The second and larger jump in activity could be seen when the North American and European sessions converge between 0000 and 1600 GMT. This four-hour overlap is the greatest union in two different sessions. The volatility can be clearly seen from the large amount of liquidity.

However, beside overlapping session, there is another factor at work that will drive price action further up or down. This driving force normally appears at around 0800 GMT. This is due to the release of economical news from the U.K. There is also another moment which economical news release will affect the price action and that is the release of the U.s. news at between 1230 to 1400 GMT, which will coincides with a sharp peak in the activity for GBPUSD, EURUSD.

There is another area that we have to consider. Each currency pair consists of 2 currencies. If the components of the currency pair are made up of currencies from the same session, they are more likely to have a greater level of activity and volatility. One such pair is the USDCAD. For the GBPJPY pair, they will see more activity and volatility during the overlapping of the Asian and European session.