One of the greatest things about forex (FX) trading is that it can be done 24 hours a day for five-and-a-half days and it is accessible from the comfort of your own home. Each market has its own characteristics and one market’s action can lead to a “domino effect” for currency gains or losses in another market. There are three basic time factors: before, during and after another exchange is trading. At times, there is an “over the shoulder” psychology as traders in one exchange watch action on another exchange.
Another key element is “arbitrage.” Arbitrage is a popular trade used to profit from variations of prices in different kind of markets. If the USD (United States Dollar) is priced differently in JPY (Japanese Yen) in Frankfurt or New York, then a professional forex trader can make a profit off this arbitrage. Here are the trading hours for the largest markets in the world (Hours are Greenwich Mean Time – GMT with all dates being the same except for the Sydney and Tokyo exchanges, which open the previous day):
+ The Frankfurt, Germany uses the DAX index. It had a 2012 market capitalization of $1.5 USD billion and runs from 6:00 a.m. to 2:00 p.m.
+ London, England uses the FTSE index. It had a 2012 market capitalization of $3.4 USD billion and runs from 7:00 a.m. to 3:00 p.m.
+ New York, United States of America uses the Dow Jones index. It had a 2012 market capitalization of $14 USD billion and runs from 12:00 p.m. to 8:00 p.m.
+ Sydney, Australia uses the ASX index. It had a 2012 market capitalization of $1.4 USD billion and runs from 10:00 p.m. to 6:00 a.m.
+ Tokyo, Japan uses the Nikkei index. It had a 2012 market capitalization of $3.5 USD billion and runs from 11:00 p.m. to 7:00 a.m.
Price discovery is allegedlythe most successful when trading is the most active. If you want the most action on a currency pair then you should select the exact time period when the operating hours overlap. Light trading can lead to dramatic rises or falls in prices as bids are not matched.
Forex traders can also note patterns on opens and Friday closes. Some market action goes right from the opening bell. For instance on Friday, many currency traders want to settle accounts, so they might sell out of weekly positions or buy a currency for the next week.
Mike Jefferson is a senior Market Analyst and Financial Writer for NetoTrade, a global forex brokerage and investment company.
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