Why Is the Forex Market Open 24 Hours a Day?
With over $6 trillion in daily revenue, the forex market is the largest exchange in the world. It’s a critical component of our global economy, and the high volume of tradable assets means that it can be a profitable source of speculative income for discerning investors.
Forex trading can be performed at any point during the week, no matter what time it is or where you are in the world. But why does the market remain open for so long? How does this perpetual activity relate to international trade? Let’s find the answers to these questions by first gaining an understanding of the nature of forex.
Understanding market hours
Forex can be traded from Monday to Friday. Markets are closed on weekends but open from as early as 5 p.m. EST on Sunday. Even though markets are closed by 4 p.m. on the following Friday, currencies can still shift in value before markets open again.
At any given point in time, at least one market around the world is open and trading. However, that market isn’t able to trade if other markets are closed, which means that active trading hours have to overlap by a few hours.
There are three main regions for forex trade: Australasia, Europe, and North America. Several important financial centers can be found in these areas, and together they facilitate the most active periods of trade.
Currencies are integral to global trade, and their value fluctuations can continue long after regional markets close. For example, if the US dollar closes at a fixed rate, that was the rate when the New York market closed. Other currencies can still be traded for dollars, and the rate of exchange will continue to fluctuate despite the closed US market.
Such frequent activity ensures that central banks, financial institutions, and private investors can trade as effectively as possible via a competitive market that always takes different time zones and demand curves into account.
Demand dictates design
The simple truth is that no other market has a high enough demand to warrant such extensive trading hours. The arrival of globalization created the need for a market that could use developing technology and increased connectivity to its advantage. The forex market is designed specifically with these principles in mind.
By using electronic communication networks (ECNs), the forex market can remain decentralized and free from overt manipulation. These networks create a global exchange that can operate in multiple time zones, thanks to the use of digital devices like computers and smartphones.
Because there is no central location for trade, transactions can be completed instantly and without the involvement of a third party. This is known as over-the-counter (OTC) trading, and it’s the most effective method of determining the exchange rate of global currencies.
Traders are always looking for ways to meet and make the demands for any particular currency, and that desire to trade drives economic growth. However, there are many factors that can cause the rise and fall of currencies, which is why many traders prefer to focus on major currency pairs.
There are four time zones based on the regions that trade forex: New York, Tokyo, Sydney, and London. The busiest time zones are New York and London, and the majority of daily trade occurs during the period when these sessions overlap.
New York and London share a 4-hour active trade window, while Sydney and Tokyo have a 7-hour overlap. Tokyo and London also share a brief trading window, but it only lasts for an hour before Australasian markets close for the day.
Some currencies, such as those from emerging markets, cannot be traded when their markets are closed. Major currency pairs, on the other hand, are available throughout market trading hours, regardless of region or time frame.
The seven major currencies are the US dollar, the euro, the British pound, the Australian dollar, the Swiss franc, and the Canadian dollar. Traders typically favor these currencies and the pairs they represent, and the high volume of trade allows for tighter spreads on these currencies during periods of heavy activity. Experienced traders know that reducing transaction costs increases their likelihood of making a profit. By focusing on the times when bid and ask prices are as close to each other as possible, they can ensure that spreads are competitive and that currencies possess an optimal level of volatility.
Alexia is the author at Research Snipers covering all technology news including Google, Apple, Android, Xiaomi, Huawei, Samsung News, and More.