Jan 29: Time line for Daily Forex Trading and When are the Optimum Moments?

by David Jenyns on January 29, 2007

In todayís foreign exchange market, investors and traders can literally trade currencies worldwide 24 hours a day, in any trading zone. The top three currency trading is among the currency dealers in London, Japan and New York. These currencies are being traded 24 hours a day and the only time that currencies stop trading is on Friday when Japan closes its doors. There is a one day window after Japan closes before Europe steps in on Monday morning to open for business.

Companies that sell and buy foreign currencies as part of their business, like independent brokers and currency dealers, only make up a small portion of the foreign exchange currency trading. With a majority of trading come from banks, brokerages and investment companies. As even more currency traders become aware of the foreign exchange markets potentiality for earning and raising capital, the forex market will continue to develop and grow at a steady pace. The forex market reaches an average daily turnover of 30 times higher than any other U.S. market.

Along with the drive for supply and demand, the forex market presses on as the enormous scope for profit potential among the currency dealers is steadily rising. The forex market also uses the free floating system that is considered more practical for todayís foreign exchange market which can experience a change in the currency rates at an estimated 4.8 seconds. After developing from connective financial centers to one unified market, the forex market is taking on a prodigious role in the countryís economy. Having expanded worldwide, the forex market is reflecting the constant growth of all international trades and their countries. When you consider the size of the foreign exchange market, it would be important to understand that any transactions that are made with a future trading broker or an independent broker, can lead to more transactions. This can be due to the brokerage businesses as they work to readjust their positions.

In order to be an effective day trader, you must understand your overall portfolio and its sensitivity to market unpredictability. This is especially important when trading foreign exchange currencies, because these currencies are priced in pairs and no single pair will trade completely independently of others. Once you gain an understanding of these correlations and how they can change, then you can use them to your advantage to control your portfolioís exposure.

Correlations Defined

There is a reason for the interdependence of foreign currency pairs, for instance, if you were trading the British pound (GBP) against the Japanese yen (JPY) or GBP/JPY pair, then youíre trading a type of derivative of the USD/JPY and GBP/USD pairs. Therefore, the GBP/JPY must be slightly correlated to one or both of the other currency pairs. Even so, the interdependence amongst these currencies will stem from more than the fact that they are in pairs. While there are some currencies that will move one right behind the other; the other currency pairs can move in different directions that often result in a more complex force. In the financial world, correlation is the statistical measure of a relationship between two securities.

Then there is the correlation coefficient that ranges between -1 and +1. The correlation of +1 indicates that two currency pairs can move in the same direction nearly 100% of the time. While the correlations of -1 indicates that two currency pairs are likely to move in the opposite direction 100% of the time. If the correlation is zero, this indicates that the relationships between the currency pairs will be completely at random.

Yet, itís clear that correlations are not always stable. Correlations do change, as the global economic system and other various factors can change on a daily basis, making the ability to follow the shift in correlations very important. The correlations of today may not be in line with the long term correlations between any two currency pairs. This is why itís suggested to take a look at the past six months trailing correlation to provide a more clear perspective on the average relationship between the two currency pairs. This change comes from a variety of reasons, with the most common including a currency pairís predisposition to commodity prices, the diverging monetary policies and unique political and economic circumstances.

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