If you have ever traveled to another country, then you may have needed to exchange your money to the local currency in order to pay for the goods and services in that country. In this regard, you have already taken part in Forex trading and the global Forex market.
When companies buy goods from other countries, they need to first purchase the local currency just as we do when going on vacation. The only difference is that the big corporation exchanges larger amounts of currency, which has the potential to have an impact on the Forex market and move the price.
You probably might be asking yourself why is that possible? Answer; price is simply a reflection of supply and demand. So, when the demand for a currency increases, the price will increase as well. Because of all this exchange activity around the world, the currency exchange rate will constantly move up and down.
What is the Global Forex Market?
The global Forex market is a decentralized market where different currencies are traded. The same way you can buy and sell stocks, it’s possible to buy and sell currencies. The Forex exchange market is by far the biggest market in the world in terms of trading volume with an average daily volume around $6 trillion.
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 to make money. However, some trading hours can have more impact on the currency exchange rate than the others.
A trading day can be organized in three trading sessions:
- The Asia session starts at 12:00 AM GMT and ends at 8:00 AM.
- 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.
Each trading session has its own opening hours and between the open and the close of these trading sessions, the market has more volatility that when it is closed. During the Asia session, there is less market activity 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 Fx players are very active during this session, which leads to a lot of trading activities in most currency pairs.
Because the first half of the US session overlaps with the European session this time period is usually the most liquid time of the day with trading opportunities abound.
How does Forex trading work?
When currencies are exchanged each has an established value/price and a currency exchange rate determined by the law of supply and demand. So if there are more people that want to exchange Australian Dollars into US dollars, the price of the USD will rise against the AUD, thus the currency exchange rate will change. Conversely, if the supply side of a currency decreases, the currency exchange rate will normally fall.
What Drives Currency Exchange Rates?
To better understand what drives the currency exchange rates, we need only understand the building blocks of the supply and demand equation. There are three key factors that drive changes in the currency exchange rates.
- Central bank interest rates have a huge 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, I can be a sign that economic growth is stalling which could be negative for 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 likely wants a weaker currency in order to be competitive in the Global marketplace. In this regard, the Bank of Japan can increase the supply of its currency and devalued the Yen’s value.
- News reports and economic data might also impact the currency exchange rates.
As a trader, your task is is to identify what will and what won’t make the exchange rate move. Not all news reports are created equal and some news events might lead to bigger market reactions than the others. The best way to stay up-to-date on planned economic new events is to check an economic calendar that will provide you with the news events that can drive changes in the exchange rate.
The global Forex exchange market is where currencies are bought and sold. Being the world’s biggest market, there is a lot of liquidity available for you to start making profitable transactions. The supply and demand of a currency changes due to various economic factors which in turn drives the currency exchange rate up and down.