While there is no official time set, the Tokyo trading session is usually most active from 8 am to 4 pm Japan time. After 4 pm Japan time, the London market becomes the primary market for forex traders. The Tokyo session average volatility is lower than the London and New York sessions.
The choice of forex pairs is vital during the Tokyo session as fewer markets present good trading opportunities compared to the London and New York sessions. Sometimes the Tokyo market can be quiet, so even for day traders, there are times when the best decision is to wait for the London market to open rather than chase a trading opportunity.
Below is a list of the four most popular forex pairs ranked from best to worst according to trading opportunities.
The US dollar and the Japanese Yen are two of the most widely traded currencies in the world. During the Tokyo trading session, the USDJPY has high liquidity and volatility. Consequently, trading interest is high, with low bid-offer spreads adding to the attraction.
The USDJPY is most active around 9 am when the Japanese equity market opens and is usually the best time to look for trading opportunities. The monthly monetary policy announcements from the Bank of Japan have the most significant impact on the USDJPY, while Japanese economic announcements usually have little effect on volatility.
One of the biggest impacts on the USDJPY is how Japanese traders react to moves in the London and New York markets overnight. Therefore, studying how the USDJPY moves in the Tokyo trading session following a large move overnight can yield profitable trading opportunities.
The AUDJPY is the second-best forex pair to trade during the Tokyo session, as the Australian market is also active. Commodity prices can create strong trends in the AUDJPY. Also, economic data releases and monetary policy announcements from the Reserve Bank of Australia can result in high volatility.
Due to the recent increase in Australian interest rates, the "carry trade" where traders sell the Yen to buy the AUD, is becoming popular again. While the "carry trade" is a long-term strategy, if prices break long-term ranges, volatility can increase as "carry trade" orders enter the market.
Due to the wider spread than the USDJPY, and there is rarely any UK news during the Tokyo session, it is better to focus on trading USDJPY for day traders. There are occasionally moves against the overall trend for swing traders, which present profitable opportunities to follow the medium-term trend. If you have a strong view on the market, placing limit entry orders where you are willing to trade rather than watching the market can be a better strategy.
The GBPJPY is better to trade during the London session as the spread can become narrower and volatility is higher. It is essential to analyze the Tokyo session, though, as news in the Tokyo session can impact the London session.
The EURJPY can attract interest during Japanese business hours but rarely moves enough to present regular trading opportunities. The EURUSD volatility is low during the Tokyo trading session, so moves in the USDJPY dictate the EURJPY. Occasionally a large order EURUSD can be executed during the Tokyo session, causing a large move and usually presenting a short-term reversal trading opportunity.
While there are fewer markets than attractive to short-term traders during the Tokyo session, traders who become specialists will find consistent market patterns that can be profitably traded. However, avoiding trading trades when the Tokyo market is quiet is a challenge compared to the London and New York sessions.