The Forex market is open for business somewhere in the world 24 hours a day except for the period from the New York close at 18:00 EST/23:00 GMT on Friday evening to the Sydney/Wellington open late Sunday afternoon at 21:00 GMT/16:00 EST.GMT stands for Greenwich Mean Time and EST stands for Eastern Standard Time. We sometimes used ET for Eastern Time, meaning the New York benchmark, whatever the time of year. Sometimes it’s EST for Eastern Standard Time and from spring to fall, it’s Eastern Daylight Savings Time, so the easy way to denote New York time is the short-form ET. In practice, New York closes at 17:00 ET, but many data vendors, including eSignal, use 17:59 ET (22:59 GMT) as the “close” and 18:00 ET (23:00 GMT) as the Sydney “open.”London conducts more Forex trading than any other financial center, according to the Bank for International Settlements survey, and you will also see some data vendors and brokers using London time, either GMT or BST, the notation for daylight savings time, named British Summer Time. You may think that if you are in New York, you can just add 5 hours to get London time, but not so—the British and Americans do not coordinate the date of switching to and from daylight savings time so sometimes it is 6 hours for a few days. Chances are if you are not in the New York or London time zones, your broker adjusts the time on your screen clock to local time.It is easy to get confused, especially when a news source writes that the ECB policy decision will be delivered at 12:45 GMT and the governor’s press conference will begin at 14:30 CET, or Central European time. Even after many years, translating those times into local time can be a chore. A good way to figure out what those times are in local time is to Google “What time is it in London and Frankfurt?” You can also keep a set of clocks set to different time zones, as most professional trading rooms do.You care about what time it is in London or New York because those are the most active markets where you will find the best liquidity, and because those are the two biggest overlapping time zones. We also have overlap from Asia to the Middle East and from Switzerland/Frankfurt to London, but one of the very best times to trade is when London and New York are both open.Main Trading SessionsOne of the best time zone sites is www.timeanddate.com where you can find the UTC/GMT equivalent of every time zone.London: Greenwich Mean Time (GMT): No UTC/GMT offset.Daylight saving time: +1 hour (notation becomes BST for British Summer Time).Frankfurt/Zurich: Central European Time (CET): UTC/GMT plus 1 hour.Daylight saving time: +1 hour (notation becomes CEST for Central European Summer Time).New York: Eastern Standard Time: UTC/GMT minus 5 hours.Daylight saving time: +1 hour (notation becomes EDT for Eastern Daylight Time.Sydney/Wellington: Australian Eastern Time (AET): UTC/GMT plus 10 hours.Daylight saving time: +1 hour (notation becomes AEDT for Australian Eastern Daylight Time).Tokyo: Japan Standard Time (JST): UTC/GMT plus 9 hours (no daylight savings time).Overlapping SessionsNew York and London: 13:00 to 18:00 GMT, 8:00 to 12:00 ET.What Currencies to Trade and When?Technically you can trade any currency pair at any time, but it goes without saying that the best time to trade a currency is when its home market is open. That means you can trade the AUD/USD at noon in New York but you will find far more price action when Australia is open for trading. News releases are obviously made on local time. The best time to trade the yen (USD/JPY or EUR/JPY) is when Tokyo is open, and the very best time to trade the EUR/USD is before New York opens and then again after New York has opened. The EUR/USD does trade during the Asian session, but European news releases come out around an hour to two before the London open, meaning London traders tend to get to work early to catch them. Then the UK news releases start coming out and traders have two sets of factors to trade on, plus whatever may be still simmering from the Asian session, like a big move in equity prices, intervention, or some other major event.By the time New York opens around 8:00 ET (13:00 GMT), the European traders have gone home but London traders still have a few hours to go. The London traders may have closed most positions ahead of the US open but when they see whether the New York traders are continuing a trend started by the London traders, they may jump back in for a few hours. You will not see much action in the USD/CAD during the first part of the London session, so if you want to trade the CAD, wait for New York (and Toronto) to open.The two best times to trade major currencies in Forex are 3:00-5:00 ET (8:00 to 10:00 GMT) and again at 8:00-10:00 ET (13:00 to 17:00 GMT). The first gets you the big market — London — with both European and UK data releases. The second one is the overlap of London and New York. There is one conclusion to be drawn from this — that London traders work the longest hours of anyone in the industry.By noon New York time, trading has faded away to low volumes — unless it is a day, on which the Fed announcement is due. This is always at 14:00 ET on the Fed meeting date and you should not need a calendar to tell you when it is, because market chatter will be especially voluminous ahead of time. Some calendar events will become engraved on your memory, like 7:45 ET for ECB policy announcements (12:45 GMT) and 8:30 (14:30 CET) for the governor’s press conference, and 14:00 ET on Fed day.Depending on what currencies you are trading, it will pay you to know the exact release time and date of important data and central banks news. In some years, if you trade the yen, you will want to keep track of the news stories published by the local press near lunchtime and the end of the Tokyo day. The journalists crowd the hallways of the Ministry of Finance and the Bank of Japan to catch officials on their way in and out, hoping for a tidbit to write about. When big events are brewing, including intervention and jawboning, this is when we read about them. Tokyo is 13 hours ahead of the New York time zone, so that means an odd schedule.
Every article and website on Forex will point out that Forex is a splendid trading vehicle. Here are some of the reasons given. Some are true and useful and some are untrue or silly.Glamor: Forex is glamorous and sophisticated — the very pinnacle of international high finance.Size and liquidity: Forex is the biggest single market in the world and offers high liquidity — you won’t get stuck with no bids or too wide a bid-offer spread as in thinly traded issues.24-hour trading: When you have a day job, it is nice to have your market open in the evenings and even late Sunday. Something is always being actively traded in Forex.Easy account opening: You can open a trading account with a Forex broker far more easily than with an equity or commodities broker, with far less money, and by disclosing a lot less information about your financial condition. Some brokers let you open an account with a few hundred dollars that you can put on a credit card and start trading the same day.Free platform: Brokers offer very good trading platforms that have the relevant data and technical tools for free. Many regular equity and commodity brokers charge for data and charting.No commissions: In spot retail, you do not pay a commission, just the bid-offer spread. In regular equity and commodities trading, commissions can consume 20-40% of your profits, depending on your gain/loss ratio.These all sound like good reasons to trade Forex. However, just about everything on this list above is either not true or not useful.Glamor: give yourself a break. Securities prices trade for the same reasons and in the same patterns whether they are Apple shares, soybeans, or the Swiss franc. Trading skills, which are really money management and risk management skills, are the same whatever the asset class. There is nothing inherently more “sophisticated” about trading dollar/yen than trading Sony. In fact, trading dollar/yen is more complicated than trading Sony shares, if only because you have two economies to track, not to mention risk factors that do not affect equities, like territorial disputes, oil prices, and other things. Studying the fundamentals of Sony and its markets is no mean task in its own right, but FX fundamentals are broader and deeper. Do not confuse complexity with sophistication.Size and liquidity: while it’s true that if you are trading the pink sheets (over-the-counter equities that are unlisted on a primary exchange), you will probably run into liquidity problems, but the world is chock-full of securities that have liquidity that is more than adequate for your account management. How much liquidity do you need, anyway? If you were trading equities, you might want to scan the universe for names that traded a minimum of a 100,000 shares per day. You would get a list in the US alone of hundreds of names. The oil futures contract trades over $1 billion per day.As for 24-hour trading, plenty of commodities trade on the electronic exchange GLOBEX that is nearly 24 hours per day, and after hours equity trading on the NY Stock Exchange and NASDAQ has been around since 1998. Besides, if you know what entry you want and its associated stop and price target, what do you care when, exactly, it gets executed? Do you really want to watch the screen for hours on end?This brings up another issue — let’s say you are in the Western Hemisphere times zones and have a day job. You want to trade the early Asia market that starts in New Zealand and moves to Tokyo, Singapore and Hong Kong. Unless you are trading what is for them a local currency (NZD, AUD, SGD, yen), liquidity is not that high. More to the point, trading action tends to be rangey and sideways. We hardly ever get a breakout move (except in the local currencies) in that time period. We see a similar lull during the transition period from Hong Kong to Frankfurt. Middle East trading may offer plenty of liquidity but it hardly ever offers big moves that the savvy trader wants to exploit.As for easy account opening, brokers make it easy for you to open the account because it is easy money for them. The probability of your making high profits from your first trade onward is practically zero. All traders take losses and you will, too — it is the nature of the beast. As soon as you take a loss, the broker wants you to add more money so you can continue trading. Stories abound in the chart rooms about traders who did make gains with these brokers but could not withdraw their funds.Even after the US government raised capital and registration requirements — making US residents off-limits to most foreign brokers — plenty of fly-by-night retail Forex brokers remain. We have central clearing in the primary interbank FX market but no central clearing for retail spot Forex. Most governments do not even try to regulate the retail market. Retail brokers have many tricks to cheat the customer. Probably the most common one is that they do not even place your trade. They know you have a low capital amount and your stop is (say) 10 points. They are willing to bet that your stop will get hit and they will not have to cover the trade from their side. If your target is hit instead, they may say your stop got hit anyway even though you don’t find that price anywhere on a database of prices for the day. This is one of the benefits of futures trading, by the way, compared to spot. The Chicago Mercantile Exchange posts “time and sales” for every blessed trade done and you can prove whether a stop or target was hit. Such proof stands up in a court of law, too.This brings up the no-commission “benefit.” Be sensible here — how does the broker make any money if he does not charge commission? By adding a spread of 2-5 pips to your cost and subtracting it from your closing price. Let’s say you are trading a standard retail amount of $100,000 and paying 3 pips, or $30. The price has to move 3 pips for you to break even, and another 3 to stay even on the exit. You need to make 7 pips minimum to start making a net gain.Now we have to ask the essential question — how much do you intend to make on a $100,000 trade? If you want to day-trade three times per day and your profit target is 20 pips with a stop at 10 pips, you are aiming to make 3 x 20 = 60 pips possible gain or $60/100,000 = 0.06%. If you can do that every day with no losses, on 240 trading days per year you would make $14,400/100,000 = 14.4%. Okay, now consider that to keep the 20 points, you actually have to make 23 points because you are paying the broker 3 of them.What is the average daily range of your currency and how big a piece of it is 23 points?Let’s say your currency is the AUD and it has an average daily range of 80-100 points (actual readings for January-May 2016). You would be seeking to get 23-33% of the daily range in the right direction every day. Ask yourself how realistic that is.To add another dose of reality, consider that you may trade profitably only 51% of the time, in other words, your stop is hit a little less than half the time. You are losing 10 points per trade on about 380 trades per year or $3,600, against a gain of $7,200 for a net gain of roughly $3,600. On a face amount of $100,000, that’s 3.6%. Since you are using leverage and not actually putting up the full $100,000, your percentage return is considerable higher, of course. Nevertheless, it is a great deal of work — trading three times per day, every day, and keeping losses to 49%, for a net gain of only $3,600 per year.If you are a swing trader and put on one position that you hold for several days or even weeks, you are avoiding paying 3 points on every trade, but you have a new expense — the cost of rolling over the contract every day. We will come back to that in another section. For the moment, consider that to make the same $3,600 as the day trader who trades three times per day, you would have to get (say) 36 points but only ten times over the course of the year, net of losses. Because Forex prices are trending, this is actually not that hard to achieve.The broker being paid with spread points has an important implication for your choice of trading strategies — it is more cost-effective to be a swing trader than a day-trader.However, let’s be honest – the real reason that people want to trade Forex is leverage. Leverage is a blessing and a curse. You are in essence borrowing most of the face amount of the $100,000. In some place, you can borrow virtually all of it, but in the USA, leverage is limited to 50 times since October 2010. That means if you want to trade one lot worth $100,000, you need to put down $2,000 as your initial margin ($100,000 divided by 50). If you first trade goes against you and you take a loss, you have to top it up with more money. In practice, your first trade should be backed by the $2,000 required under the regulations plus the amount you could lose if your stop is hit (plus maybe a little extra), or at least $2,500.But the point here is not how much you should fund your first account — it’s why the broker is willing to lend you $97,500 interest-free in the first place. The first reason is that the broker expects you to fail. He expects that more than half your trades will be stopped and they will be stopped right away, at the beginning of your trading career. The broker may not have placed your trade onward with a counterparty in the first place, so if your loss was (say) $250, he gets to keep all of it. Some brokers have been accused of “hunting stops” in their own account specifically to hit the stops of small traders.The second reason he is lending you this huge amount of money interest-free is that he is earning 3 points per lot per side, or roughly $6 per round turn. On the three-trades per day described above, that is $4,320, or 4.43% on $97,500. Since the broker can borrow the $97,500 at a rate less than 4.43%, he gets to keep the difference. But in practice, he usually doesn’t need to borrow the $97,000 at all in the first place — the broker is being extended credit free or very cheaply by the banks and brokers where he is passing on your trades. In essence, they give the broker free or cheap credit to drive volume to their trading desks. Bottom line, the broker is motivated to get and to keep your trading business, and the more day-trading you do, the better he likes it, because of that $3 per side profit he is making.
What Is Forex?“Forex” is the abbreviation most used today for “foreign exchange,” meaning the price of one currency in terms of another currency. By definition, all Forex prices refer to the relationship between two currencies, i.e., a pair of currencies.The term “Forex” is used interchangeably with the term “FX.” Both are used today and both refer to the same thing, foreign exchange. The term “FX” is mostly used in the US while “Forex” was more broadly used in the UK until recently. Professional traders in the US at banks and brokers tend to use the term “FX” while “Forex” is the term used in the retail market, adopted from the British usage. Also used is the word “currency,” as in “I trade currencies” or “something happened in the currency market.”Foreign exchange refers literally to money, or more accurately, to money in two different denominations. The “exchange” part of the term means giving one thing of monetary value in return for a different thing of equivalent value. The word exchange refers to the transaction in which each of two parties is willing to exchange his respective basket of money for the equivalent amount of money denominated in the second currency. The price at which the two parties are willing to make the exchange is the exchange rate.The price of one currency in terms of another currency is called a “rate” and not a “price,” although the word “price” is equally valid and often used. Foreign exchange is the only market in which the word rate is used in place of the word price. The reason for this usage is probably due to the word “rate” being used since the Middle Ages to refer to a tariff or tax levy, since converting one currency to another entails applying a ratio or a proportion to one currency relative to the other. A common Latin phrase is “pro rata” from “pro rata parte,” meaning “in proportion.” The word “rate” in English comes from the Latin “rata.”What Is Being Exchanged?Since foreign exchange refers to two baskets of money, each with its own denomination, a foreign exchange transaction can be as simple as buying a basket of 165 dollars in return for £100 at an airport kiosk. The exchange rate is $1.65 per UK pound sterling.Why is the exchange rate not £0.6061 per dollar? This the same exchange rate, just expressed differently (it is the reciprocal, or 1 divided by 1.65). The answer lies in the historical convention of quoting the price of other currencies in terms of what they cost in pounds. The pound sterling was the benchmark currency for centuries until just after World War II, meaning the central currency against which all other currencies were judged and priced.After World War II, the US dollar became the benchmark currency and most other currencies were priced in terms of how many units of the foreign currency you could get for one dollar.As a rule, any money not issued by your home government is “foreign.” The natural way to look at foreign exchange is to ask: “How many units of the foreign currency can I get for a fixed amount of my home currency?” This is how a tourist or an importer looks at foreign exchange. But because the dollar is currently the benchmark currency against which almost all others are priced, the dollar comes first in the name of many currency pairs, although not all. The first name in a currency pair is generally the important name and the second is the secondary or less important one.Putting a name first is to assume that the fixed amount is denominated in that currency and the variable amount will be the other currency. In other words, the first currency is the base and you are applying a ratio to derive the price of second currency. When the European Monetary Union decided to quote the euro in the format “Euro/USD” and “Euro/JPY,” etc. it was a deliberate choice to make the euro the more important of the two currencies in every pair.The rule is that whichever name comes first is the one that is getting stronger on higher numbers and weaker on lower numbers. If the number goes up in the pound, for example, from 1.6000 to 1.6500, it means the pound is getting stronger and by definition, the dollar is getting weaker because in this pair, the full quote should read GBP/USD. It is accurate to express the quote as $1.6000 to $1.6500, meaning the pound used to cost $1.6000 but now it costs $1.6500. Journalists usually apply the convention of putting the dollar sign in front of the price quote, although brokers and analysts tend not to insert the currency symbol.This is also true of the euro (EUR/USD) so a higher number always means the euro is getting stronger vis-à-vis the dollar. You could say the EUR/USD moved from 1.3200 to 1.3900, meaning it got more expensive in dollar terms. If you are new to Forex, you can place an imaginary currency symbol in front to the first-named currency to get your bearings. Therefore, the price quote now looks like $1.3200 to $1.3900.The pound, euro, Australian dollar, and New Zealand dollar are the top key currencies in which the dollar does not come first, because of historic convention. All other currencies are quoted in terms of dollars, such as USD/CHF = US dollar against the Swiss franc.Below is the Yahoo! Finance’s list of major currencies. Yahoo! Finance is one of many providers of market information in the professional and retail Forex market. Other providers, including brokers, have their own version of this list.Major currency pairs by Yahoo! FinanceCross-ratesA few decades ago, a cross-rate was any currency pair that did not include your home currency. The US dollar/Japanese yen exchange rate would be a cross-rate for someone in the UK or Europe, for example.Today, however, the common definition of a cross-rate is any currency pair that does not include the dollar. Therefore, the USD/JPY exchange rate is a “major” exchange rate and not seen as a cross-rate by people in the UK or Europe, while the AUD/CAD would be seen as a cross-rate by everyone, including Australians and Canadians, even though the rate includes their home currencies.This convention for defining a cross-rate is not accepted everywhere and you will see lists in newspapers and websites that define cross-rates differently. The US dollar accounts for about 70% of global government money reserves and 70% of world trade, so placing the dollar as a component in all the major exchange rates is not without justification. In fact, there are more dollars in banknotes and bank deposit accounts outside the US than inside the US, so it may be accurate to say the dollar is the most-used currency in some places even though it is not the home currency. However, when someone says "the euro," he is always talking about EUR/USD and never talking about EUR/GBP, in which case the second currency must be named.See the list of Yahoo! Finance's European cross-rates. This is a typical list for European countries:Cross-rates by Yahoo! FinanceEvolving PracticesYahoo!, one of the top news and data providers, chooses to include non-dollar crosses as “major world currencies.” As a practical matter, if you are trading euro/dollar, you can say “euro” without the word “dollar” and you will be understood. If what you really mean is “euro/yen”, though, you must say the name of the second currency.TradingWhen you go to the airport kiosk to exchange your home currency for another one, you are not trading. You are a price-taker. The kiosk sign tells you what exchange rate will be applied and you are stuck with it. You can take it or leave it.This is not trading. Trading is the process of going back and forth with the opposing party until you discover the price that makes each of you the least unhappy. Trading involves negotiating a price that satisfies both parties and can involve game-playing, deceit, and other tricks. You may be bidding on something the other person thinks is more valuable than you do, or you may be offering something you value more highly than other people out there who want to buy. When the final price is reached and both parties have agreed upon it, the result is a contract, whether by handshake or formal paperwork, that you will deliver your basket of currency to the other party and he will deliver his basket of his currency to you at some specified place and time. As a rule, in practice the actual exchange is a wire transfer from one checking account to another in the two countries of issuance of each currency.