How a 24 Hour Trading Market Works for the Average Joe Investor

Posted 06/05/2009, 9:00 am EST by Sean Hyman from tradingmarkets.com

Most Main Street investors are used to standard market hours.

The opening bell rings at 9:30 each morning to the sounds of Wall Street traders shouting on the floor. Then we hear the final stock bell at 4:00 PM to mark the close of each day’s trading. This is how stocks, bonds, commodities and most other investments trade, so investors grow very accustomed to trading on specific exchanges within these timeframes.

In fact, we’re all so used to these normal trading hours that it’s difficult for some investors to imagine a market that trades 24 hours a day like the spot Forex market does.

After all, this market has always been a “mystery” anyway. Such a mystery that the majority of investors never put a single penny in the spot Forex market, much less trade it on a regular basis.

But take it from me: They’re all missing out.

Introducing the Only “Open All Hours” Market

The currency market trades 24 hours a day, 6 days a week. (Everyone has to have a break sometime, even currency traders.)

Unlike stocks, this market does not have a physical exchange. In fact, the currency market is technically a bunch of the world’s biggest banks and brokerage firms trading currency with themselves. So the only “exchange” you’ll find takes place in cyberspace as they’re trading. These big-time traders produce so much volume that it has become the world’s biggest market.

But this market really opened up to the retail trader around 1995 (even though most traders have only learned of this market since about 2002). This is when these big banks and other market makers opened up their market to the regular guy on Main Street.

This market was able to open to the public because the “trading size” finally shrunk to a manageable amount for the average investor.

From Billions of Dollars Per Trade, to Thousands of Dollars Per Trade

You see in the interbank market, these banks typically trade “yards.” A “yard” is US$1 billion worth of currency. (Yes, that’s “billion” with a “B.”)

Later on, some really rich guys were able to join in the Forex trading game when the minimum trading size shrank to US$1 million per lot (obviously still too much for the normal investors on Main Street).

However, this market finally embraced the retail investors when the large market makers (Forex brokers) introduced “standard lots” to the currency trading public. These standard lots still exist today, and allow you to control US$100,000 worth of currency with a single trade. This was a HUGE step down from the million dollar lots or billion-dollar yards traded before.

Today, you have even a smaller option for trading currency. You can choose to trade the standard lots with US$100,000 units of currency. Or you can trade what’s known as “mini-lots,” which allow you to buy a currency trade worth only US$10,000 units of currency.

You can even trade what are called “micro-lots” which let you control US$1,000 worth of currency. (Honestly, I don’t recommend it because these lots are so tiny, it’s difficult to make any returns, but it’s an option if you’re easing into the currency markets slowly.)

This is a highly leveraged market, so you can invest as little as US$50 to control one mini-lot worth US$10,000. Or you could invest as little as US$500 to control US$100,000 etc.

These smaller lots naturally let you invest with smaller minimums, so more currency investors can try their hand at currency trading. These smaller trading styles have let the “average Joes” of the investment world take part in this market.

Now that we know how it came to the public, let’s talk about how it trades all around the world.

Currencies Chase the Sun Around the World Each Day

Like any market, you can’t trade foreign currencies until someone in the world is available to buy and sell trades from you. In the currency market, this happens 24 hours a day…in different parts of world.

Remember, there is no starting bell to begin currency trading for the week. Instead, you know it’s time to start trading, when you see traders placing trades on your computer screen.

Every week, the currency market technically cranks up in Auckland, New Zealand on Sunday (which is their Monday).

On the other side of the world, trading generally starts around 2 p.m. EST on Sunday. First you’ll see New Zealand traders placing their bets, then Australian traders join the action shortly after.

The trading doesn’t really pick up speed until the Asian traders join the market several hours later. The Asian session begins in earnest around 7 p.m. EST Sunday night. However, even then, trading stays a bit thinner than usual. You can still trade but the volume isn’t as high as during the usual business week.

The Asian session runs from 7 p.m. EST to about 4 a.m. EST. Then Asia passes the trading baton to London. The London session technically starts an hour before the Asian session ends - at 3 a.m. EST. The London traders are then open for business from 3 a.m. to around 12 noon EST.

Of course by then, New York is well into trading by the time London traders call it a day. There is a big overlap here because the U.S. session cranks up around 8 a.m. EST. So there is a good four hours where the London session and U.S. sessions are both in full swing. (The trading volumes are huge at this time and this is the time slot that many traders focus upon.)

Then the U.S. session winds down around 5 p.m. EST when the “international trading day” officially ends. At this point, trading still goes on but it’s very thin until 7 p.m. EST when the Asian session is in full swing once again.

Less Market Gaps, More Trading

It is possible for some sparse interbank trades to take place even when the traditional market hours aren’t open. It’s not that common, but it does happen.

Normally the volume is so huge in this market that “gaps” are very uncommon EXCEPT between Friday’s close and Sunday’s opening.

Both stocks and commodities show gaps on charts all over the place. But you’ll find these to be an extremely rare occurrence in the currency markets. And that’s because the volume is so much bigger (even when it’s thin trading for the currency market) that it’s still usually liquid enough to propel worldwide trading with very few gaps.

So welcome to the world’s biggest market - the market that rarely sleeps. It just takes a quick nap between Friday around 4 p.m. (when most U.S. market makers close up shop for the week) through Sunday at around 2 pm EST.

Note: Each Forex broker (aka market maker) could start up their own market making later on Sunday and end earlier on Friday. Many of them do this to help ensure that the volumes you will need for efficient trading are there.

So when you’re ready to dive into the deep end, check out the currency market. I think you’ll love swimming around the world’s biggest market that offers 24 hour a day trading opportunities for you.

It definitely beats the six and a half hour window you have to trade stocks every day!