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What is the Global Forex Market?

FX Scouts By Jeffrey Cammack Updated: September 11th, 2019

The global Forex market is a decentralised market where currencies are traded. In a similar fashion to buying and selling stocks, it’s possible to buy and sell currencies.

The Forex exchange market is by far the biggest financial market in the world, with average daily trading volume standing around 6 trillion USD.

Open 24 Hours a Day, 5 Days a Week

One of the main advantages of the Forex market is that it’s open around the clock, five days a week. No matter your time zone there are always trading opportunities. However, some trading hours have more impact on the currency exchange rate than others.

A trading day can generally be organised into three trading sessions:

  • The Asia session starts at 00:00 GMT and ends at 8:00 AM GMT.
  • The London session starts at 7:00 AM GMT and ends at 5:00 PM GMT.
  • The New York session starts at 1:00 PM GMT and ends at 10:00 PM GMT.

Between the open and close of these trading sessions the market is more volatile. During the Asia session, there is less market activity than the others and the market tends to move in small ranges, making this particular trading session great for short-term trading opportunities.

According to BIS data (Bank for International Settlement), more than 30% of all Forex transactions happen during the London session. The banks and major Forex players are very active during this session, leading to high volatility for most currency pairs.

The first half of the US session overlaps with the London session, this period is usually the volatile time of the day and the best for trading opportunities.

How does Forex trading work?

When we exchange currencies, each has an established value/price determined by supply and demand. So if more people want to exchange Australian dollars into US dollars, the price of the USD will rise against the AUD. Conversely, if the supply side of a currency decreases, the currency exchange rate will typically fall.

What Drives Currency Exchange Rates?

To better understand what drives the currency exchange rates, we need to examine the factors behind Forex supply and demand. Three key factors drive changes in currency exchange rates.

  • Central bank interest rates have a significant influence on currency exchange rates. If the central banks hike interest rates, it can mean the economy is growing, and the future economic outlook is optimistic which, in theory, is positive for the currency exchange rate. If the central bank cuts interest rates, it can be a sign that economic growth is stalling which could be harmful to the currency exchange rate.
  • Central bank interventions can be done either directly or indirectly through unconventional monetary policies. For example, since Japan’s economic growth is very dependent on exports, it generally pursues a weaker currency to be competitive in the global marketplace. In this regard, the Bank of Japan can increase the supply of the Yen, leading to a devaluation in the currency.
  • News reports and economic data also impact the currency exchange rates.

As a trader, you need to identify what will and what won’t impact exchange rates. Not all news reports and data are created equal, and some news events lead to more significant market movement than others.

The best way to stay up-to-date on planned economic news events is to check an economic calendar that will provide you with the news events that can drive changes in the exchange rate.

Conclusion

The global Forex exchange market is where currencies are bought and sold. As the world’s largest financial market, the volatility means there are a lot of opportunities for traders.

The supply and demand of a currency changes due to various economic factors, which in turn drives currency exchange rates up and down.

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Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.