If there is one type of financial market that has quickly gained popularity in the past two decades becoming very soon the home for the vast majority of retail traders and that is still remaining a source of attraction for millions of people, this is the Forex market.
Before you rip into the actual how-to-do-it part of Forex trading or others Forex related stuff, it’s pretty important first that you know what Forex really is.
What is Forex?
Forex, also known as FX or retail off-exchange currency market, is the acronym of FOReign EXchange and it refers to the market where businesses, investors, financial institutions and other interested parties, trade agreements to exchange one currency for another at the current market rate with delivery in two business days. These trades are known as “Spot” transactions and that’s why the FX market is also known as the Spot Forex market.
The FX market originated in 1971 when many of the major world currencies began moving towards free-floating exchange rates; it is therefore considered the oldest foreign exchange market and it represents the underlying market for all foreign exchange related derivatives such as futures, forwards, swaps, options and contract for differences. The original purpose of this market was to support international trade and investment by allowing various banks and global businesses trading worldwide to convert one currency to another, nowadays the vast majority of the volume generated by FX spot transactions is made for speculative reasons. According to the latest Triennial Central Bank Survey, coordinated by the Bank for International Settlements (BIS), the average daily turnover of the FX market reached nearly 2 trillion dollars, counting 30% of all foreign exchange transactions.
Forex financial hubs and trading day
In order to meet the huge and continuous demand for the exchange of currencies that comes from several market participants spreaded in different geographical areas, the Forex market does not close at the end of each business day, instead trading just shifts to different financial centers around the world allowing FX participants to trade 24 hours a day for five days from 5pm EST or 10pm GMT Sunday till 5pm EST or 10pm GMT Friday.
More specifically, the trading day starts with the open of Oceania session, here the main trading centres are Wellington (New Zealand) and Sydney (Australia); two hours later the opening of Oceania session, the Asia session comes online with Tokyo (Japan) that also acts as the main Asian financial center. Just before the Asia session closes, the Europe session takes over with the opening of Frankfurt (Germany) session at 2am EST or 7am GMT and then with that of London (Great Britain) at 3am EST or 8am GMT. Halfway through the European trading day, the Americas session comes online at 8am EST or 1pm GMT with New York (United States) that also act as the US main financial centre. The America session close at 5pm EST or 10pm GMT, then the Asia and Oceania session reopens for a new trading day. Although Tokyo and New York generate a very large level of FX spot transactions, London has the lead as the world’s premier foreign exchange trading venue and this is mainly because London based traders can both trade the Asia and Americas session along with the London session. The period when London and New York session overlap is the busiest of the entire trading day and accounts for the majority of volume traded.
Even if currencies trade 24 hours a day for 6 days in a row, there is still a “closure” of the trading day which is considered by Forex market players at the time of 5pm EST or 10pm GMT; that is the period when Rollover takes place through banks and brokers and with the lowest volume in the FX market as New York session is over, the Asia session has not yet started and Europe session is asleep.
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