A:

The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex is not done at one central location but is conducted between participants through electronic communication networks (ECNs) and phone networks in various markets around the world.

The market is open 24 hours a day from 5pm EST on Sunday until 4pm EST Friday. The reason that the markets are open 24 hours a day is that currencies are in high demand. The international scope of currency trading means that there are always traders somewhere who are making and meeting demands for a particular currency.

Currency is also needed around the world for international trade, as well as by central banks and global businesses. Central banks have 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 pegged to the value of gold.

At each second of every day, countries' economies are growing and shrinking because of economic and political instability and infinite other perpetual changes. 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 many countries seek to mitigate the risks of doing business in foreign markets and hedge currency risk.

To do this, they enter into currency swaps, giving them the right, but not necessarily the obligation to buy a set amount of a foreign currency for a set price in another currency at a date in the future. By doing this, they are limiting their exposure to large fluctuations in currency valuations. Due to the importance of currencies on the international stage there needs to be round-the-clock trading at all times. Domestic stock, bond and commodity exchanges are not as relevant, or in need, on the international stage and are not required to trade beyond the standard business day in the issuer's home country. Due to the focus on the domestic market, demand for trade in these markets is not high enough to justify opening 24 hours a day, as few shares would be traded at 3am, for example.

The ability of the forex to trade over a 24-hour period is due in part to different time zones and the fact it is comprised of a network of computers, rather than any one physical exchange that closes at a particular time. When you hear that the U.S. dollar closed at a certain rate, it simply means that that was the rate at market close in New York. But it continues to be traded around the world long after New York's close, unlike securities.

The forex market can be split into three main regions: Australasia, Europe and North America. Within each of these main areas there are several major financial centers. For example, Europe is comprised of major centers like London, Paris, Frankfurt and Zurich. Banks, institutions and dealers all conduct forex trading for themselves and their clients in each of these markets.

Each day of forex trading starts with the opening of the Australasia area, followed by Europe and then North America. As one region's markets close another opens, or has already opened, and continues to trade in the forex market. Often these markets will overlap for a couple hours providing some of the most active forex trading. So if a forex trader in Australia wakes up at 3am and decides to trade currency, they will be unable to do so through forex dealers located in Australasia but they can make as many trades as they want through European or North American dealers. With all of this action happening across borders with little attention to time and space, the sum is that there is no point during the trading week that a participant in the forex market can't potentially make a currency trade.

(For further reading, see Getting Started in Forex.)

RELATED FAQS
  1. How safe are money market accounts?

    Learn the difference between a money market account and a money market fund. Both savings vehicles are relatively safe, but ... Read Answer >>
  2. Why is Belize considered a tax haven?

    Explore the factors that make Belize one of the most modern and corporate-friendly tax havens in the world, including its ... Read Answer >>
  3. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  4. Why would a homebuyer need to take out PMI (private mortgage insurance)?

    Learn why some home buyers are required to take out private mortgage insurance (PMI), and how it affects the total monthly ... Read Answer >>
  5. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  6. What are the disadvantages of a Roth IRA?

    Get informed about Roth IRAs, which have a few disadvantages, including limited access to funds and contribution limits based ... Read Answer >>
Related Articles
  1. Mutual Funds & ETFs

    High Dividend ETF: iShares Core High Dividend vs. Vanguard Dividend Appreciation (HDV, VIG)

    Get a comparison review of two high dividend yield ETFs: the iShares Core High Dividend ETF and the Vanguard Dividend Appreciation ETF.
  2. Retirement

    A Guide to Arizona's State Retirement System

    The Arizona State Retirement System offers a defined-benefit plan for former teachers, state workers and public employees.
  3. Mutual Funds & ETFs

    2 Reasons to Be Wary of New ETFs (IFLY, EQLT)

    Pay attention to the number of thematic and smart beta ETFs that may fail to survive as a result of poor performance and thin trading volume.
  4. Forex

    Global Utilities: Exploring Revenue Trends & Fundamentals

    Analyze global revenue exposure in the utilities sector to learn about the impact of currency, regulation and economic growth on geographic contributions.
  5. Home & Auto

    4 Alternatives to a Traditional Mortgage

    If you can't qualify for or don't want a traditional mortgage, one of these options might be right for you.
  6. Home & Auto

    Understanding Mortgage Impound Accounts

    Home buyers with low down payments may get stuck with higher mortgage payments. Find out what you get for the extra money.
  7. Investing

    Municipal Bonds Offer Something More for Everyone

    Are municipal bonds really for me? The popular perception is that tax-exempt income only benefits those investors in the highest tax brackets.
  8. Retirement

    5 Top Alternatives to a Reverse Mortgage

    If you have substantial home equity and don't want to do a reverse mortgage to tap it for retirement expenses, cost out these viable alternatives.
  9. Credit & Loans

    What Is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  10. Home & Auto

    Understanding Mortgage-Backed Securities

    Find out the meaning of this popular asset-backed security and its benefits for banks and investors.
RELATED TERMS
  1. Primary Mortgage Market

    The market where borrowers and mortgage originators come together ...
  2. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  3. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  4. Mortgage Originator

    An institution or individual that works with a borrower to complete ...
  5. Secondary Mortgage Market

    The market where mortgage loans and servicing rights are bought ...
  6. Mortgage Pool

    A group of mortgages held in trust as collateral for the issuance ...
Hot Definitions
  1. Hawk

    A policymaker or advisor who is predominantly concerned with interest rates as they relate to fiscal policy. A hawk generally ...
  2. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  3. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  4. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  5. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  6. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
Trading Center