Forex Market Is Open 24 Hours a Day
The forex market is the largest financial market in the world. Trading in the forex is not done at one central location but is conducted between participants by phone and electronic communication networks (ECNs) in various markets around the world.The market is open 24 hours a day in different parts of the world, from 5 p.m. EST on Sunday until 4 p.m. EST on Friday. At any point in time, there is at least one market open, and there are a few hours of overlap between one region’s market closing and another opening. The international scope of currency trading means there are always traders across the globe who are making and meeting demands for a particular currency.Currency is also needed around the world for international trade, by central banks, and global businesses. Central banks have particularly relied on foreign-exchange markets since 1971 when fixed-currency markets ceased to exist because the gold standard was dropped. Since that time, most international currencies have been “floated” rather than tied to the value of gold.
The Reasoning Behind Around-the-Clock Trading
The ability of the forex market to trade over a 24-hour period is due in part to different international time zones, and the fact trades are conducted over a network of computers rather than any one physical exchange that closes at a particular time. For instance, when you hear that the U.S. dollar closed at a certain rate, it simply means that was the rate at market close in New York. That is because currency continues to be traded around the world long after New York’s close, unlike securities.The two busiest time zones are London and New York. The period when these two trading sessions overlap (London afternoon and New York morning) is the busiest period and accounts for the majority of volume traded in the $6 trillion a day market.2 It is during this period where the Reuters/WMR benchmark spot foreign exchange rate is determined. The rate, which is set at 4pm London time is used for daily valuation and pricing for many money managers and pension funds.
Price Swings in Forex
Economic and political instability and infinite other perpetual changes also affect the currency markets. Central banks seek to stabilize their country’s currency by trading it on the open market and keeping a relative value compared to other world currencies. Businesses that operate in multiple countries seek to mitigate the risks of doing business in foreign markets and hedge currency risk.Businesses enter into currency swaps to hedge risk, which gives them the right but not necessarily the obligation to buy a set amount of foreign currency for a set price in another currency at a date in the future. They are limiting their exposure to large fluctuations in currency valuations through this strategy.
High Liquidity
Compared with any other financial market, the forex market has the largest number of market participants. This provides the highest level of liquidity, which means even large orders of currency trades are easily filled efficiently without any large price deviations. This eliminates the possibility of price manipulation and price anomalies, thereby enabling tighter spreads that lead to more efficient pricing.Traders don’t need to worry about the high volatility during opening and closing hours, or stagnant price ranges during the afternoons, which are trademarks of equity markets. Unless major events are expected, one can observe similar price patterns (of high, mid, or low volatility) throughout the non-stop trading.
Low Capital Requirements
Due to tight spreads in terms of pips, one can easily start forex trading with a small amount of initial capital. Without more capital, it may not be possible to trade in other markets (like equity, futures, or options). Availability of margin trading with a high leverage factor (up to 50-to-1) comes as the icing on the cake for forex trades. While trading on such high margins comes with its own risks, it also makes it easier to get better profit potential with limited capital.
The Bottom Line
It is important to take advantage of market overlaps and keep a close eye on news releases when setting up a trading schedule. Traders looking to enhance profits should aim to trade during more volatile periods while monitoring the release of new economic data. This balance allows part-time and full-time traders to set a schedule that gives them peace of mind, knowing that opportunities are not slipping away when they take their eyes off the markets or need to get a few hours of sleep.
