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. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  3. How do I Implement a Forex Strategy when spotting a Sanku (Three Gaps) Pattern?

    A forex trading strategy can easily be implemented to profit from a market reversal signal that comes from the sanku, or ... Read Full Answer >>
  4. What's a good forex strategy to use when spotting a Wedge-shaped Pattern?

    Use wedge-shaped patterns to identify bullish or bearish price action when trading currencies in the foreign exchange (forex) ... Read Full Answer >>
  5. How do I use Time Segmented Volume (TSV) for creating a forex trading strategy?

    You could use time segmented volume (TSV) to build a forex trading strategy, which allows you to compare volume data to determine ... Read Full Answer >>
  6. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
Related Articles
  1. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  2. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  3. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  4. Forex

    How 2016 Could Be A Disaster for These Currencies

    Tanking oil prices, slowing BRIC growth, and general instability do not bode well for these currencies.
  5. Forex Strategies

    How To Build A Forex Trading Model

    The forex market is volatile, but a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
  6. Forex Fundamentals

    Explaining Slippage

    Slippage occurs when a trade is executed at a different price than what was expected.
  7. Forex Education

    About the EGP, or Egyptian Pound

    The EGP, or the Egyptian pound, is the currency of Egypt.
  8. Forex Education

    The History Of Money: From Barter To Banknotes

    Money has been a part of human history for at least 3,000 years. Learn how it evolved.
  9. Forex Education

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  10. Mutual Funds & ETFs

    UUP: Powershares DB US Dollar Bullish Fund ETF

    Explore information and detailed analysis of two popular currency exchange-traded funds, the PowerShares DB U.S. Dollar Bullish and Bearish Index Funds.
RELATED TERMS
  1. Currency

    Currency is a generally accepted form of money, including coins ...
  2. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  3. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  4. ICE LIBOR

    See LIBOR
  5. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  6. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center