OVERLAP IN FOREX: WHY IT'S THE MOST VOLATILE PERIOD

What Is the Forex Market Overlap?

The Forex market operates 24 hours a day, five days a week, across different global regions. It opens in Sydney, followed by Tokyo, then London and finally New York. Each session has unique characteristics based on the region’s economic activity. However, when two sessions operate simultaneously — known as an “overlap” — trading behaviour intensifies, and liquidity surges.

The primary overlaps are:

• London–New York overlap: Occurs between 13:00 and 17:00 GMT. This is the most significant and active overlap period.
• Tokyo–London overlap: Occurs around 08:00 to 09:00 GMT, generally less volatile than the London–New York overlap.
• Sydney–Tokyo overlap: Happens between 00:00 to 02:00 GMT, typically not as liquid.

The London–New York overlap is the most liquid because these are the two most influential financial centres. During this window, traders from both sides of the Atlantic are active, economic news from Europe and North America is released, and institutional orders hit the market.

Liquidity — the ease with which assets can be bought or sold — increases because more market participants are transacting. This surge in participation naturally leads to higher trading volumes. With more market orders comes greater movement in currency prices, resulting in elevated volatility.

For traders, particularly those employing intraday strategies or scalping techniques, overlaps present desirable conditions. Lower spreads, faster order execution, and increased price movement create rich opportunities — although they also demand a greater level of risk management.

In essence, the Forex market overlap is not merely a “time window” — it is a mechanism of convergence where global liquidity meets the velocity of news and capital. This convergence amplifies both opportunity and risk.

Why Are Overlaps So Volatile?

Market volatility is the degree of variation in currency prices over a given period. During Forex session overlaps, such as the London–New York exchange, volatility typically surges due to several converging factors. Understanding these contributors is key for traders aiming to harness — or hedge — short-term price action.

1. Dual Centre Activity

Liquidity providers and institutional traders in multiple economic hubs are active at the same time. For example, during the London–New York overlap, banks, hedge funds, and central banks in both regions are executing high-volume trades.

This dual activity increases the depth and breadth of the market. With both European and American institutions engaged, more currency pairs, particularly EUR/USD, GBP/USD, and USD/CHF, experience tighter spreads and substantial movement.

2. Economic Reports and Data Releases

Many of the world’s major economic reports are released during this period:

• Non-Farm Payroll (NFP)
• U.S. Inflation and GDP
• European Central Bank (ECB) press releases
• UK employment and retail reports

These reports often deviate from forecasted figures, jolting currency values as market participants either adjust or exit positions.

3. Order Assimilation and Rebalancing

Traders in overlapping regions finalise or initiate positions to align with new information. When various institutional strategies collide — for instance, stop-loss triggers and algorithmic responses — price movement becomes accelerated and potentially erratic.

4. High Trading Volume

Overlaps witness peak trading volumes. In particular, the London–New York window accounts for an estimated 50% of total daily Forex volume. This encourages significant participation from both speculative and hedging entities.

Higher trading volume doesn’t always equate to volatility, but when paired with news flows and active rebalancing, it substantially increases the likelihood of sharp price swings.

5. Speculative Activity

Retail traders and speculative institutions are particularly active during these hours. Execution is smoother due to higher liquidity, and price moves are more predictable — until they’re not, which can exacerbate market risk. Fast-moving markets also tend to attract momentum and trend-following strategies that can further fuel volatility.

It’s crucial to understand that volatility is not inherently negative. Traders use volatility to seek profit opportunities. However, poor risk management during these periods can exaggerate losses.

Ultimately, it is the concentration of activity, news flow, and speculative interest — all within a compact time frame — that make overlaps the most volatile phase of the trading day.

Strategic Considerations for Traders

To maximise opportunities during overlap periods in the Forex market, traders must apply tailored strategies that account for both the heightened market activity and inherent volatility of these sessions. The focus must be placed not only on potential gains but also on minimising risk.

1. Focus on Major Pairs

During the London–New York overlap, pairs like EUR/USD, GBP/USD, USD/JPY, and USD/CAD see the most liquid and volatile action. These pairs offer deeper order books, smaller spread costs, and frequently respond to macroeconomic data releases with strong directional moves.

2. Timing Entry and Exit Points

With volatility peaking, entries should be based on clear signals — either technical or fundamental. Breakout strategies around economic news or consolidations just ahead of key data points, such as inflation releases or central bank announcements, can deliver meaningful movements.

Exit strategies should be pre-defined; relying on real-time intuition during high volatility can lead to poor decisions. Using tools like stop-losses, trailing stops, and profit targets is essential. Many seasoned traders also reduce position size to mitigate risk as leverage amplifies losses in volatile conditions.

3. Risk-Reward Calibration

Trading during overlaps demands disciplined risk management. Tools for controlling drawdowns include:

• Set a fixed risk per trade (e.g., 1% rule)
• Use Average True Range (ATR) to adjust stops for volatility
• Use news calendars to avoid entering trades before expected reports

4. Avoid Overtrading

The excitement of fast market movement can lead to overtrading. Too many entries within a volatile window can drain capital quickly. Stick to a defined trading plan and avoid re-entry post-loss just to "recover."

5. Use the Overlap Selectively

Not all overlaps represent equal opportunity. Compare historical average volatility and volume data. For most traders, the London–New York overlap represents optimal trading conditions, whereas the Tokyo–London window often presents less volatility.

6. Technical vs. Fundamental Approaches

Volume-based strategies like Volume Weighted Average Price (VWAP) or order block theory can integrate well in the overlap window. At the same time, fundamental plays using calendar events and market sentiment indicators like the Commitment of Traders (COT) report or sentiment gauges can direct trade bias.

Ultimately, overlap sessions represent an arena of high opportunity and equally high risk. For traders equipped with robust systems, clear exit strategies, and disciplined execution, these periods offer the ideal environment to extract returns from the Forex market.