The Best Forex Pairs to Trade During the Tokyo Session

The Forex market is featured by its 24-hour activity, divided into three major trading sessions: the Tokyo (Asian), London (European), and New York (American) sessions. Each session stands for unique characteristics and offers different opportunities for traders. The Tokyo session, as the first to open after the weekend, holds particular significance due to its impact on currency pairs involving the Asian market. Here are the best forex pairs to trade during the Tokyo session for optimal profitability.

1. USD/JPY (U.S. Dollar/Japanese Yen)

The USD/JPY pair is a prime choice during the Tokyo session due to the significant volume of transactions between the United States and Japan. Market liquidity for this pair is at its highest when the Tokyo market is open, providing smoother trades and better price stability. Traders can benefit from economic releases and policy announcements from Japan, which often lead to increased volatility and trading opportunities.

2. AUD/JPY (Australian Dollar/Japanese Yen)

Given Australia's close economic ties with Asia, the AUD/JPY pair experienced large movement during the Tokyo session. This pair is particularly sensitive to changes in Asian stock markets and commodities prices, making it a favorable choice for traders looking to leverage economic indicators and market sentiment in the Asian-Pacific region.

3. EUR/JPY (Euro/Japanese Yen)

The EUR/JPY pair combines two major currencies, making it highly liquid during both the Tokyo and European sessions. This liquidity overlap allows traders to take advantage of fluctuations resulting from European market activities impacting the Asian trading hours. The pair is known for its volatility, which can lead to significant trading opportunities.

4. GBP/JPY (British Pound/Japanese Yen)

Known as “the dragon” among traders, the GBP/JPY is notorious for its volatility and is a popular choice during the Tokyo session. The pair's movements are influenced by the interplay between Asian and European market dynamics, offering potential for profit in short-term trades. However, traders should be wary of the increased risk due to the pair's rapid price movements.

5. NZD/JPY (New Zealand Dollar/Japanese Yen)

The NZD/JPY pair is another excellent choice for the Tokyo session, as New Zealand's economy is closely linked with Asia. Traders often look to this pair for opportunities stemming from the Asian market's reaction to commodity price changes, especially in dairy and agricultural products, sectors where New Zealand is a major player.

A Real Example: Gain Profits by Trading the Best Forex Pairs During the Tokyo Session

Alex, a seasoned forex trader, who has been closely monitoring the dynamics of the Tokyo session to leverage opportunities within the unique landscape of the Asian markets. With a well-honed strategy, Alex sets sights on two specific pairs: AUD/JPY and USD/JPY, known for their liquidity and volatility during these hours. Here's how Alex crafts a trade to capture profits from the Tokyo session's unique opportunities.

Before the Tokyo session begins, Alex reviews the latest economic indicators from Australia and Japan, noting a stronger-than-expected Australian job report and a stable economic outlook from Japan. With the Australian dollar poised to strengthen against the yen, Alex sees an opportunity with the AUD/JPY pair. As the Tokyo market opens, Alex observes an initial dip in AUD/JPY, likely due to short-term traders taking profits. Believing in the pair's strength, Alex enters a long position at 75.50, betting on the Australian dollar's appreciation.

Simultaneously, Alex turns attention to the USD/JPY pair. Recent U.S. economic data has been positive, suggesting strength against the yen. Alex decides to enter a long position in USD/JPY at 109.20, anticipating a rise fueled by U.S. economic optimism.

Alex sets a stop-loss for each trade to manage risk: 75.00 for AUD/JPY and 108.80 for USD/JPY. For profit targets, Alex aims for 76.20 in AUD/JPY and 109.80 in USD/JPY, setting tight trailing stops to protect gains as the positions move in favor. Throughout the Tokyo session, both the Australian and U.S. dollars begin to appreciate against the yen. The AUD/JPY quickly hits Alex's target at 76.20, securing a profitable exit. Meanwhile, the USD/JPY trade also moves favorably, reaching 109.80. Thanks to the trailing stop, Alex manages to capture additional gains, closing the position at 109.95 as the pair continues to rise before retracing.

Reflecting on the trades, Alex credits success to thorough preparation and an understanding of the economic indicators influencing the currency pairs. The profitable outcomes underscore the importance of timing, risk management, and the ability to act decisively based on market dynamics.

Trading Strategies for the Tokyo Session

Trading during the Tokyo session in the forex market requires a blend of strategic foresight and nimble execution. The Asian markets bring unique volatility and liquidity, especially in pairs like USD/JPY, AUD/JPY, and EUR/JPY. Here are key strategies tailored for these pairs, coupled with practical examples to give you better illustration.

Economic Release Trading

Economic Release Trading involves trading based on the volatility that follows major economic announcements from Japan, Australia, or China, which can significantly impact the Asian market.

For example, Jordan spots an upcoming release of Japan's quarterly GDP data. Anticipating higher volatility, Jordan decides to trade USD/JPY. Expecting a strong report, Jordan enters a long position just before the data release. The GDP outperforms expectations, strengthening the yen against the dollar. Jordan quickly profits from the yen's spike, closing the position at a favorable rate.

Breakout Trading

The Tokyo session often sets the tone for currency ranges. A breakout strategy involves identifying these ranges and setting trades that capitalize on the currency breaking out of this range.

For instance, Alex observes that AUD/JPY has been trading in a tight range for several days. Noticing the buildup of momentum and aligning with a positive Australian economic forecast, Alex places a buy order above the range's resistance level. As the market opens and the forecast is confirmed, AUD/JPY breaks out upwards, and Alex's position is triggered, capturing profits as the trend continues.

Carry Trade Adjustments

The carry trade, a strategy of buying a high-interest-rate currency against a low-interest-rate currency, can see adjustments during the Tokyo session as traders in Asia react to global market changes. Consider this example: Taylor holds a long-term carry trade, selling JPY to buy AUD, capitalizing on the interest rate differential. Knowing the Tokyo session can bring announcements affecting interest rates or economic outlooks, Taylor closely monitors Asian market news. When Japan hints at interest rate hikes, Taylor adjusts the position to reduce exposure, protecting the carry trade from potential JPY strengthening.

Scalping

Scalping involves making numerous trades to profit from small price changes, a technique well-suited to the Tokyo session's liquidity and volatility, especially right after it opens.

For example, Sam, a scalper, focuses on EUR/JPY during the Tokyo session. Sam notices a pattern of small but consistent movements in the pair during the first hour of the session. By entering and exiting trades quickly, capitalizing on just a few pips at a time, Sam accumulates substantial profits throughout the session.

Technical Analysis and Pattern Trading

Use technical analysis to identify patterns and signals that indicate potential market movements. The Tokyo session, with its unique dynamics, can offer clear patterns for those who know what to look for. Casey studies GBP/JPY and identifies a recurring head and shoulders pattern forming during the Tokyo session. Anticipating a downward movement once the pattern completes, Casey places a short sell order at the neckline's break. The pattern completes as anticipated, and GBP/JPY falls sharply, allowing Casey to capture significant gains from the trade.

Conclusion

To excel in the Tokyo forex session, traders must strategically plan, observe keenly, and adapt to changing market conditions. Focusing on essential pairs like USD/JPY, AUD/JPY, EUR/JPY, GBP/JPY, and NZD/JPY opens up significant opportunities. Employing methods such as trading based on economic releases, technical analysis, and pattern recognition is crucial. Success, ultimately, depends on a deep understanding of global economic indicators, market sentiment, and technical patterns.

Disclaimer: All information published in this article is intended for informational purposes only, and it should not be considered as individual recommendations.

FAQs

Q: What makes the Tokyo session unique in forex trading？

A: The Tokyo session marks the start of the forex trading day, characterized by specific market liquidity and volatility due to economic releases from Asia, affecting currency pairs like USD/JPY and AUD/JPY.

Q: Why is USD/JPY a popular pair during the Tokyo session？

A: USD/JPY is popular due to the volume of trade between the U.S. and Japan and its sensitivity to Japanese economic policies and U.S. economic indicators, making it highly volatile during the Tokyo session.

Q: Can economic releases from countries outside of Japan impact the Tokyo session？

A: Yes, economic releases from Australia, New Zealand, and China, among others, can significantly impact currency pairs traded during the Tokyo session, influencing market sentiment and volatility.

Q: What is a carry trade adjustment, and why is it relevant during the Tokyo session？

A: A carry trade adjustment involves managing positions in currency pairs with different interest rates, relevant during the Tokyo session due to potential announcements affecting interest rates or economic outlooks in Asia-Pacific countries.

Q: How important is technical analysis in trading during the Tokyo session？

A: Technical analysis is crucial for identifying trading opportunities during the Tokyo session, as patterns and technical indicators can provide insights into market movements and potential entry and exit points.