The FX market is the world's largest financial market. Trading in forex does not take place in a single location, but rather between participants via phone and electronic communication networks (ECNs) in numerous markets across the world.
From 5 p.m. EST on Sunday to 4 p.m. EST on Friday, the market is open 24 hours a day in various areas of the world. At any one moment, at least one market is open, and there is a few hours of overlap between one region's market shutting and another region's market starting. Because currency trading is so global, there are constantly traders all around the world making and satisfying requests for a certain currency.
Currency is also required for international trade, central banks, and multinational enterprises all over the world. Since 1971, when fixed-currency markets ceased to exist due to the abandonment of the gold standard, central banks have depended heavily on foreign-exchange markets. 1 Since then, most foreign currencies have "floated," rather than being connected to the value of gold.
KEY NOTES
• The forex market is open 24 hours a day in various areas of the world, from 5 p.m. EST on Sunday to 4 p.m. EST on Friday.
• The forex market's capacity to trade over a 24-hour period is owing, in part, to distinct international time zones.
• As one region's markets close, another opens, or has already opened, and continues to trade in the currency market.
The Justification for Round-the-Clock Trading
The forex market's capacity to operate 24 hours a day is owing in part to multiple worldwide time zones, as well as the fact that deals are done through a network of computers rather than any one physical exchange that closes at a specific time. For example, when you hear that the US dollar closed at a specific rate, it simply means that was the rate at the end of the trading day in New York. This is because, unlike stocks, money continues to be traded across the world long after New York closes.
Domestic stocks, bonds, and commodities are not as relevant or in demand on the world arena, and so are not obliged to trade beyond the issuer's home country's regular business day. Due to the concentration on the local market, the demand for trade in these markets is not large enough to warrant opening 24 hours a day, implying that few shares would be traded at 3 a.m. in the United States.
The amount of money transacted on the FX market per day.
Europe's biggest financial cities are London, Paris, Frankfurt, and Zurich.
Banks, institutions, and dealers all engage in forex trading for themselves and their clients in each of these markets.
Every forex trading day starts with the Australasia area, then Europe, and lastly North America. As one region's markets close, another region's markets open, or have already opened, and currency trades continue. These markets typically overlap for a few hours at a time, resulting in some of the busiest forex trading times.
For example, if a forex trader in Australia wakes up at 3 a.m. and wants to trade currency, they will be unable to do so through Australasia-based forex dealers, but they will be able to do so through European or North American dealers.
The forex market is divided into three primary regions: Australasia, Europe, and North America, each having many significant financial hubs.
Recognizing Forex Market Hours
Banks, commercial enterprises, central banks, investment management firms, hedge funds, retail forex brokers, and investors from all over the world participate in international currency markets. Because this market runs in many time zones, it may be accessed at any time of day or night, with the exception of weekends.
The international currency market is dominated by a worldwide network of exchanges and brokers rather than a single main exchange. Forex trading hours are determined by when each participating country opens for business. While time zones overlap, the following are the widely accepted time zones for each region:
• 8 a.m. to 5 p.m. EST in New York (1pm to 10pm UTC)
7 p.m. to 4 a.m. EST in Tokyo (12am to 9am UTC)
5 p.m. to 2 a.m. EST in Sydney (10pm to 7am UTC)
3 a.m. to 12 p.m. EST in London (8pm to 5pm UTC)
• London and New York have the busiest time zones. The time when these two trading sessions overlap (London afternoon and New York morning) is the busiest and accounts for the majority of the volume traded in the $6 trillion per day market. 2 The Reuters/WMR benchmark spot foreign exchange rate is set during this time period. Many money managers and pension funds utilize the rate, which is established at 4 p.m. London time, for daily appraisal and pricing.
• While the FX market is open 24 hours a day, several currencies in some emerging economies are not. The world's seven most traded currencies are the US dollar, the Euro, the Japanese yen, the British pound, and the Australian dollar, Canadian dollar, and New Zealand dollar, all of which are traded constantly while the forex market is open.
• Speculators generally trade in pairings that cross between these seven currencies from any nation in the globe, however they prefer higher volume times. When trading volumes are high, forex brokers will provide tighter spreads (bid and ask prices that are closer to each other), lowering transaction costs for traders. Similarly, institutional traders prefer times with higher trading volume, albeit they may tolerate bigger spreads in exchange for the ability to trade as soon as feasible in response to fresh information.
• Despite its extremely decentralized character, the forex market remains an effective transfer method for all players as well as a global access tool for individuals wishing to speculate from anywhere on the planet.
• FOREX price fluctuations
Currency markets are also affected by economic and political instability, as well as an endless number of other constant changes. Central banks attempt to stabilize their country's currency by trading it on the open market and maintaining its relative value in relation to other foreign currencies. Businesses that operate in several countries aim to reduce the risks associated with doing business in international markets and to hedge currency risk.
• To hedge risk, businesses enter into currency swaps, which allow them the right but not the duty to buy a certain quantity of foreign currency for a certain price in another currency at a future date. Through this technique, they reduce their exposure to significant swings in currency values.
• The Final Word
• Because currency is a worldwide requirement for central banks, international trade, and global companies, a 24-hour market is required to meet the demand for transactions across time zones. To summarize, it is reasonable to believe that at no moment throughout the trading week, a forex market participant will not be able to conduct a currency deal.
[Note: If you're interested in day trading in the currency market, Investopedia's Forex Trading For Beginners course is a good place to start.]