Best Pairs to Trade in the Tokyo Session
In the Tokyo session, the forex market is relatively quiet compared to the more volatile London or New York sessions. This quietness doesn't mean less opportunity; it means different opportunities. Traders who understand this can use it to their advantage by focusing on pairs with high liquidity during this session, typically involving the Japanese yen. But it's not just about the yen. There are other currency pairs worth considering as well. By the end of this article, you'll know exactly which pairs are the best to trade during the Tokyo session and why these pairs make the most sense.
The Tokyo Session Explained
Before diving into the best currency pairs, it's important to understand the nature of the Tokyo session itself. The Tokyo session officially runs from 11:00 PM GMT to 8:00 AM GMT. It is the first major session of the day, overlapping briefly with the Sydney session but closing before the London session opens.
During this period, Asian markets are at the forefront. Japan's stock market (Nikkei 225) often leads market sentiment, and economic reports from Japan, Australia, and New Zealand frequently influence market behavior. However, the Tokyo session is known for its lower volatility and slower pace, which appeals to traders who prefer calm, calculated decisions rather than rapid-fire moves.
Currency Pairs with the Japanese Yen (JPY)
Unsurprisingly, the Japanese yen (JPY) is the most actively traded currency during the Tokyo session. The yen is involved in roughly 16.8% of all forex trades, according to the Bank for International Settlements. When the Tokyo market is open, JPY pairs tend to move more due to the flow of news and data from Japan.
1. USD/JPY: The Most Popular Tokyo Pair
The USD/JPY pair is the most liquid and widely traded pair during the Tokyo session. Liquidity is essential for good trading conditions because it ensures that spreads remain tight and slippage is minimized. Since both Japan and the U.S. are major global economies, there is a steady stream of economic news impacting the pair. When Japan releases economic reports, especially around manufacturing, employment, or inflation data, the pair sees a noticeable impact.
During the Tokyo session, traders can also benefit from movements tied to U.S. Treasury yields, which often impact the yen's performance. For traders who prefer trading a steady and liquid pair, USD/JPY is an excellent option.
2. EUR/JPY: Volatility in the Asian-European Crossover
Another great pair to consider is EUR/JPY. While less liquid than USD/JPY, it is still highly active during the Tokyo session. This pair benefits from both Asian and European market dynamics, as European traders start to wake up and position themselves for the upcoming day during the late stages of the Tokyo session.
The economic interdependence between the European Union and Japan also adds to the trading opportunity. Traders who are adept at interpreting economic releases from the Eurozone (especially Germany) alongside Japanese data often find profitable setups in this pair.
3. AUD/JPY: Sensitivity to Risk Sentiment
If you're looking for a pair that is heavily influenced by risk sentiment, AUD/JPY is your go-to choice. Australia and Japan have a strong economic relationship, and the Australian dollar is sensitive to commodity prices and Chinese economic data, which frequently drops during the Tokyo session.
During periods of risk aversion (e.g., when stock markets decline), the yen strengthens, causing AUD/JPY to drop. Conversely, in risk-on environments, AUD/JPY tends to rally. The Tokyo session is perfect for observing these moves in real-time, as Japanese traders respond to changes in global sentiment.
Non-Yen Currency Pairs to Consider
Though yen pairs dominate the Tokyo session, there are several other currency pairs that provide excellent trading opportunities.
4. AUD/USD: A Commodity-Centric Pair
The AUD/USD pair is highly active during the Tokyo session because Australia's economy is closely tied to commodities, especially metals and mining, which see significant activity in the Asian markets.
Additionally, this pair is sensitive to Chinese economic data, which is typically released during the Tokyo session. Since China is Australia's largest trading partner, any data concerning Chinese GDP, manufacturing, or trade can send ripples through the AUD/USD pair.
5. NZD/USD: New Zealand’s Close Ties to Asia
Similarly, the NZD/USD pair is another commodity-based currency that is highly active in the Tokyo session. New Zealand, like Australia, has strong trade relations with China and other Asian nations, making it sensitive to Asian market dynamics. The NZD/USD pair often moves in tandem with AUD/USD, offering traders another option to capitalize on Asian market data.
6. GBP/JPY: High Volatility for Experienced Traders
For traders who thrive on volatility, GBP/JPY is an excellent pair to trade during the Tokyo session. The British pound is historically more volatile than most other currencies, and when combined with the yen, it creates a pair that is prone to large moves.
This pair is ideal for more experienced traders who can handle large swings in either direction. The Tokyo session can sometimes serve as a prelude to even greater volatility when the London session opens and British economic data is released.
Why Trade the Tokyo Session?
One might ask, "Why should I trade the Tokyo session when it’s less volatile than the London or New York sessions?" The answer is simple: it’s all about finding the right fit for your trading style. Some traders excel in fast-paced, volatile environments, while others prefer the calm, predictable moves of the Tokyo session.
Additionally, the Tokyo session provides:
- Lower spreads: Since fewer traders are active, liquidity is high for yen pairs, and spreads are generally lower.
- Predictable movements: The slower pace allows traders to analyze the market without feeling rushed or overwhelmed.
- Early opportunities: Since the Tokyo session overlaps with the Sydney session and closes just before London opens, traders can catch moves early in the trading day.
Key Economic Events During the Tokyo Session
Being aware of significant economic releases during the Tokyo session is essential for success. The following are some of the most critical reports to watch:
Japan’s Gross Domestic Product (GDP): The GDP report is one of the primary indicators of the Japanese economy’s health. A better-than-expected GDP report often leads to a stronger yen, while a weaker report can have the opposite effect.
Bank of Japan (BoJ) Policy Announcements: BoJ meetings and announcements are significant for JPY pairs. The central bank’s stance on monetary policy can cause massive market movements. Traders must pay close attention to any potential shifts in interest rates or asset purchase programs.
Australian Employment Data: Australia’s employment reports, particularly the unemployment rate, can influence AUD pairs heavily during the Tokyo session. A positive jobs report can boost the Australian dollar, while a weak report can lead to a decline.
Conclusion
Trading the Tokyo session offers a different kind of challenge compared to the high-volatility environments of the London or New York sessions. By focusing on the right currency pairs, particularly those involving the Japanese yen, traders can take advantage of the session’s unique characteristics. The best pairs to trade during this session are USD/JPY, EUR/JPY, AUD/JPY, AUD/USD, NZD/USD, and GBP/JPY.
Each pair has its advantages, whether you're looking for liquidity, volatility, or sensitivity to global market sentiment. Armed with the right strategy, traders can profit consistently from the Tokyo session by understanding market movements and staying alert to key economic releases. Remember, success in forex trading is about finding the right pairs at the right time—and during the Tokyo session, the right pairs are clear.
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