Forex (FX)

Forex stands for “foreign exchange” and refers to the buying or selling of one currency in exchange for another. While it is called “foreign” exchange, this is just a relative term. The terms “foreign” and “domestic” are relative to the person using the term. What is foreign to someone is considered domestic to another. “Currency exchange” would be a more appropriate term. The forex (also known as “foreign exchange” or “FX”) market is a global marketplace where currencies are traded and where exchange rates for every currency are determined.

What is Forex (FX)?

It is a decentralized or over-the-counter (OTC) market that involves all aspects of buying, selling, and exchanging currencies .In terms of trading volume, the forex market is the largest market in the world, with an average daily trading volume of $6.6 trillion.

You'll often see the terms: FX, forex, foreign exchange market, and currency market. All these terms are synonymous and all refer to the forex market.

Currency trading was very difficult for individuals prior to broadband internet. Most currency traders were large multinational corporations, hedge funds, or high-net-worth individuals (“HNW”) because trading currencies required a lot of capital. Once high-speed internet became more affordable to more people, a retail market aimed at individual traders emerged, providing easy access to the foreign exchange markets. Forex Trading platforms now offer very high leverage to individual traders who can control a large trade with a small account balance.

What is the forex market?

With over $5 trillion traded in the market every day, the forex market is the largest in the world. The forex market is open 24 hours, 5.5 days a week from late Sunday to Friday. It opens Sunday at 5:00 pm ET and closes Friday at 5:00 pm ET. Trading begins with the opening of the market in New Zealand. And continues as more financial centers open: Sydney, Singapore, Hong Kong, Tokyo. Zurich, Frankfurt, Paris, London, and finally, New York City. As the trading day in the U.S. ends, the forex market starts again in Auckland, New Zealand.

Learn more about forex market hour and specific forex trading sessions in Asia, Europe, and North America.

Now that you know what forex is, why you should trade it, and who makes up the forex market, it’s about time you learned when you can trade. It’s time to learn about the different forex trading sessions. Yes, it is true that the forex market is open 24 hours a day, but that doesn’t mean it’s always active the entire day. You can make money trading when the market moves up, and you can even make money when the market moves down. BUT you will have a very difficult time trying to make money when the market doesn’t move at all. And believe us, there will be times when the market is as still as the victims of Medusa. This lesson will help determine when the best times of the day are to trade.

Forex Market Hours

Before looking at the best times to trade, we must look at what a 24-hour day in the forex world looks like.The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and Trump’s favorite time to tweet (before he was banned), the New York session.Historically, the forex market has three peak trading sessions.Traders often focus on one of the three trading periods, rather than attempt to trade the markets 24 hours per day.This is known as the “forex 3-session system“.These sessions consist of the Asian, European, and North American sessions, which are also called Tokyo, London, and New York sessions.Some traders prefer to differentiate sessions by names of the continent, other traders prefer to use the names of the cities.(We prefer using city names but continents are cool also.)

The International Dateline is where, by tradition, the new calendar day starts.Since New Zealand is a major financial center, the forex markets open there on Monday morning, while it is still Sunday in most of the world.Even though trading starts in New Zealand, it’s still called the Sydney session. Makes no sense but we don’t make the rules.Until Friday, there is no time during the week when the market formally closes, although there is a brief lull in activity between about 19:00 and 22:00 GMT when most American traders have gone home and most Kiwi and Aussie traders are getting ready for work.Other than the weekends, there are just two public holidays when the entire forex market is closed, Christmas and New Year’s Day.Below are tables of the open and close times for each session:

Actual open and close times are based on local business hours, with most business hours starting somewhere between 7-9 AM local time.

Daylight Savings Time

Open and close times will also vary during the months of October/November and March/April as some countries (like the United States, United Kingdom, and Australia) shift to/from daylight savings time (DST).The day of the month that a country shifts to/from DST also varies, confusing us even more.And Japan doesn’t observe daylight savings, so thank you Japan for keeping it simple.Now, you’re probably looking at the Sydney Open and wondering why it shifts two hours in the Eastern Timezone.You’d think that Sydney’s Open would only move one hour when the U.S. adjusts for standard time, but remember that when the U.S. shifts one hour back, Sydney actually moves forward by one hour (seasons are opposite in Australia).Keep this in mind if you ever plan to trade during that time period.Dealing with DST is a pain but that’s what happens when a market trades around the clock!It’s important to remember that the forex market’s opening hours will change in March, April, October, and November, as countries move to daylight savings on different days.

Trading Session Overlaps

LOCAL TIME	EST	UTC
Sydney Open – 7:00 AMSydney Close – 4:00 PM	4:00 PM1:00 AM	9:00 PM6:00 AM
Tokyo Open – 9:00 AMTokyo Close – 6:00 PM	7:00 PM4:00 AM	12:00 AM9:00 AM
London Open – 8:00 AMLondon Close – 5:00 PM	2:00 AM11:00 AM	7:00 AM4:00 PM
New York Open – 8:00 AMNew York Close – 5:00 PM	8:00 AM5:00 PM	1:00 PM10:00 PM

Also take notice that in between each forex trading session, there is a period of time where two sessions are open at the same time. For example, during the summer, from 3:00-4:00 AM ET, the Tokyo session and London session overlap and during both summer and winter from 8:00 AM-12:00 PM ET, the London session and the New york session overlap. Naturally, these are the busiest times during the trading day because there is more volume when two markets are open at the same time. This makes sense because, during those times, all the market participants are wheeline’ and dealine’, which means that more money is transferring hands. Now let’s take a look at the average pip movement of the major currency pairs during each forex trading session.

PAIR	TOKYO	LONDON	NEW YORK
EUR/USD	76	114	92
GBP/USD	92	127	99
USD/JPY	51	66	59
AUD/USD	77	83	81
NZD/USD	62	72	70
USD/CAD	57	96	96
USD/CHF	67	102	83
EUR/JPY	102	129	107
GBP/JPY	118	151	132
AUD/JPY	98	107	103
EUR/GBP	78	61	47
EUR/CHF	79	109	84

From the table, you will see that the London session normally provides the most movement .Notice how some currency pairs have much larger pip movements than others.To see the average pip movement for specific currency pairs in real-time, you can use our Market Milk™ tool. For example, here’s the volatility per hour for EUR/USD filtered by London and NY sessions:Let’s take a more in-depth look at each of the sessions, as well as those periods when the sessions overlap. Unlike other markets (like the stock market), this means that currencies are being traded at all times, day or night. What makes this “round-the-clock” trading possible is because there is no central marketplace for foreign exchange. Since institutional currency trading takes place directly between two parties (bilateral transactions) in an over-the-counter (OTC) market, this means that there are no centralized exchanges .Instead, the forex market run by a global network of banks and other organizations. This means that all transactions occur via computer networks between traders around the world (instead of on one centralized exchange).Most traders speculating on forex prices do not take delivery of the currency itself. They do not want a truckload full of euros delivered to their front door. Instead, traders will make exchange rate predictions to take advantage of the price movements in the market. The most popular way of doing this is by trading derivatives, such as a rolling spot forex contract. Trading derivatives allow you to speculate on an asset’s price movements without taking ownership of that asset. For example, when trading forex, you can predict the direction in which you think a currency pair’s price will move. The extent to which your prediction is correct determines your profit or loss.

Three Types of Forex Markets

There are three different ways to trade on the forex market: spot, forward, and future.

Forex trading in the spot market has always been the largest market because it is the “underlying” asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual currency traders for a longer period of time. But with the arrival of broadband internet, faster and cheaper computers, online trading became more accessible and affordable and along came retail forex brokers. Since then, the spot market has grown exponentially and has overtaken the futures market as the preferred trading market for individual currency traders.

The spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, politics (domestic and international), as well as the future performance expectations of one currency against another. When a deal is finalized, this is known as a “spot deal. ”It is a bilateral transaction by which one party gives an agreed-upon currency amount to the other party (the “counterparty”) and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement. Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the CME Group. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterparty to the trader, providing clearance and settlement. Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiration, although contracts can also be bought and sold before they expire. The forwards and futures markets are used by big international corporations to hedge against future exchange rate fluctuations, but currency speculators take part in these markets as well.

What is forex trading?

Forex trading is the simultaneous buying of one currency and selling another. When you trade in the forex market, you buy or sell in currency pairs. Each currency in the pair is listed as a three-letter code. The first two letters stand for the country (or region), and the third letter standing for the currency itself. For example, USD stands for the US dollar and CAD for the Canadian dollar-In the USD/CAD pair, you are buying the U.S. dollar by selling the Canadian dollar.

How to read a currency quote

The first currency listed in a forex pair is called the base currency, and the second currency is called the quote currency (also known as the “counter currency“).The price of a forex pair is how much one unit of the base currency is worth in the quote currency. For example, for the currency “EUR/USD”, EUR is the base currency and USD is the quote currency. If EUR/USD is trading at 1.1080, then one euro is worth 1.1080 U.S. dollars If the euro rises against the dollar, then a single euro will be worth more dollars and the pair’s price will increase. If it drops, the pair’s price will decrease. If you think that the base currency in a pair is likely to strengthen against the quote currency, you can buy the pair (“go long”).If you think it will weaken, you can sell the pair (“go short”).

What is leverage in forex trading?

Leverage allows you to increase your exposure to a financial market without having to commit as much capital. When trading forex, you have the ability to open a position on leverage. When trading with leverage, you don’t need to pay the full value of your trade upfront. Instead, you put down a small deposit, known as margin. But when you close a leveraged position, your profit (or loss) is based on the full size of the trade. This means that leverage can magnify your profits, but it also magnifies your losses. Your losses can even exceed your initial deposit! When trading with leverage, it is crucial that you learn how to manage your risk.

What is margin in forex trading?

Margin is a key part of leveraged trading. Margin is the term that used for the initial deposit you put up to open and maintain a position. When you are trading forex with margin, remember that your margin requirement will change depending on your broker, and how large your trade size is. Margin is usually expressed as a percentage of the full position. For example, to open one min lot position (10,000 units) on EUR/USD, you might only require a deposit of 2% of the total value of the position for it to be opened. This means that while you are still risking $10,000, you’d only need to deposit $200 to get the full exposure.

What is a pip in forex trading?

Pips are the units used to measure movement in a forex pair. A forex pip usually refers to a movement in the fourth decimal place of a currency pair. For example, if EUR/USD moves from $1.10500 to $1.10510, then it has moved a single pip. The decimal places that are shown after the pip are called pipettes, fractional pips, or “micro pips”, and represent a fraction of a pip. The exception to this rule is when the quote currency is listed in much smaller denominations, with the most common example being the Japanese yen. In this case, a movement in the second decimal place constitutes a single pip. For example, if USD/JPY moves from ¥110.00 to ¥110.01, it has moved a single pip.

What is the spread in forex trading?

All forex quotes are quoted with two prices: the bid and ask. If you want to buy, you use the ask price. If you want to sell, you use the bid price. So “ask = buy” and “sell = bid”. In forex trading, the spread is the difference between the buy and sell prices quoted for a forex pair. For example, if the buy price (the “ask”) on EUR/USD was 1.1053 and the sell price (the “bid”) was 1.1051, the spread would be two pips. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price, which slightly below the market price.

What is a lot in forex trading?

Currencies are traded in lots, which are batches of currency used to standardize the quantity for forex trades. In forex trading, a standard lot is 100,000 units of currency. There are also smaller sizes available, known as mini lots and micro lots, worth 10,000 and 1000 units respectively.

If these lots are too tiny for you, you can also trade a “yard” which is a billion units (1,000,000,000).

How is the forex market regulated?

How do you regulate a market that is trading 24 hours a day, all over the world? Despite the enormous size of the forex market, there is no global regulation since there is no governing body to police it 24/7.There is no centralized body governing the forex market. Instead, there are governmental and independent bodies around the world who supervise domestic forex trading, as well as other markets, to ensure that all forex providers adhere to certain standards. The regulatory bodies regulate forex by setting standards that all forex brokers under their jurisdiction must comply with. These standards include being registered and licensed with the regulatory body, undergoing regular audits, communicating certain changes of service to their clients, and more. This helps ensure that forex trading is ethical and fair for all involved. In the U.S., the two primary regulatory agencies responsible for regulating the forex market are the Commodities Futures Trade Commission (CFTC) and the National Futures Association (NFA).

LOT	NUMBER OF UNITS
Standard	100,000
Mini	10,000
Micro	1,000

FOREX