The foreign exchange (forex) market is open 24 hours a day, five days a week. This allows traders to react to news and events that might cause currency prices to rise or fall at any time of day. However, the market does close on Friday afternoons and throughout the weekend. Understanding how the closing forex market impacts trading and prices is an important aspect of developing effective trading strategies.
What Time Does the Forex Market Close?
The forex market is broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session. The market “closes” when the New York session ends at 5:00 PM EST on Friday. This is when trading activity and volume drop off significantly for the weekend.
Here are the closing times for the four major forex trading sessions:
- Sydney: Closes at 5:00 PM Sydney time
- Tokyo: Closes at 6:00 PM Tokyo time
- London: Closes at 5:00 PM GMT
- New York: Closes at 5:00 PM EST
So in summary, the forex market closes every Friday at 5:00 PM New York time and remains closed throughout the weekend until it reopens Sunday afternoon New York time. This equals a 63-hour period where there are lower volumes and more limited currency pair movements each week.
Why Does the Forex Market Close?
Unlike the stock market which trades on organized exchanges with set open and closing times, the OTC forex market trades electronically over-the-counter. So why does forex close at all if it’s an electronic 24-hour market?
There are two main reasons the forex market closes:
1. Lack of liquidity – With markets in Asia, Europe, and North America closed over the weekend, liquidity and trading volume drop sharply. Lower liquidity translates to higher volatility and wider spreads.
2. Release of news events – Major announcements like employment data, GDP growth, and interest rate decisions occur only on weekdays during business hours. The market closes to prevent huge currency gaps from news announcements over the weekend.
Banks and companies need the forex market to be open during normal business hours to conduct foreign exchange transactions. But with minimal news events and liquidity, there is little benefit for the forex market to stay open 24/7.
What Happens When the Forex Market is Closed?
Trading does not completely cease when the forex market is closed over the weekend. Here is what still takes place:
- Electronic trading – Some offshore forex brokers that cater to retail traders may keep markets open. But there is limited liquidity, wide spreads, and high volatility.
- Future markets – Futures on currencies stay active throughout the weekend, tracking the spot forex market. But futures see lower volume.
- Cross rates – Traders can still obtain implied prices for currency pairs from their cross rates. For example, EUR/JPY rates might be derived from EUR/USD and USD/JPY. But cross rates may not always align with actual forex prices.
- Technical analysis – Traders engage in technical analysis to spot trend reversals and chart patterns for the week ahead. But less activity makes technical analysis less reliable over weekends.
- News monitoring – Traders keep an eye out for any weekend news that could impact markets on Sunday night and Monday morning. But fewer events occur while forex is closed.
Overall, forex trading dries up significantly when the market closes. Traders respond to lower liquidity by widening spreads, reducing leverage, and being cautious with weekend technical analysis.
Price Gaps When Forex Market Opens
Since the forex market is closed over the weekend, it can result in sharp price changes between Friday’s close and Sunday’s open. These price gaps happen because currencies often gap up or down on Monday based on news and events that emerge while forex was closed.
Here are some examples of weekend news that can cause price gaps:
- Surprise interest rate decisions from central banks
- Unexpected election or referendum results
- Geopolitical turmoil like conflict or terrorist attacks
- Major corporate acquisitions and bankruptcies
- Critical economic data like employment reports
These weekend events cause pent-up buying and selling pressure to be unleashed at Sunday’s open, pushing currencies sharply higher or lower. Traders reacting to the news Try to cover positions or place speculative bets, fueling volatility.
Here are some tips for dealing with weekend forex price gaps:
- Use guaranteed stop loss orders to limit downside risk
- Place resting buy and sell limit orders to capitalize on gaps
- Reduce position sizes to account for higher volatility
- Avoid holding positions over the weekend if possible
- Closely monitor news feeds for potential weekend events
Overall, traders should be prepared for price gaps up or down each Sunday night and early Monday morning. By anticipating volatility and using prudent risk management, traders can even profit from gaps in the forex market open.
The Sydney Open Sets the Tone
When the forex market opens each Sunday at 5:00 PM New York time, the first trading session to watch is Sydney. As one of the first markets to open, the Sydney forex open often sets the tone for the trading week and gives a sense of where overnight sentiment has shifted.
Here’s what to expect during the Sydney session open:
- Liquidity returns – Sydney trading provides the first influx of liquidity and trading activity since Friday’s New York close. But volumes are still well below normal levels.
- Gap fills – Gaps up or down often partially fill during the Sydney session open as markets start to normalize. But gaps don’t always completely fill right away.
- Volatility – The combination of lingering news effects, lower liquidity, and position adjustment makes volatility elevated during Sydney. Markets start to normalize but remain unstable.
- Trend development – Based on the sentiment coming out of the weekend, nascent trends often develop during Sydney that give clues regarding the week ahead.
So the Sunday open in Sydney tends to provide useful signals for the prevailing sentiment and potential trends and reversals ahead. Traders keep a close eye on the market’s reaction and watch for signs of strength or weakness.
Sunday Open Strategies
When trading the Sunday open, either during Sydney or leading into New York, it’s important to employ strategies to account for the unique characteristics of this trading period. Here are some tips:
- Use limit orders – Place resting limit orders above and below Friday’s close to capitalize right away if a gap occurs. Manage them actively as new information emerges.
- Wait for trend confirmation – Let volatility settle and look for confirmation of any emerging trends through signs like increasing volume, breaks of key levels, and momentum oscillators.
- Consider both directions – Often the prevailing sentiment is unclear Sunday night, so be nimble and objective in considering potential long or short trades.
- Reduce position size – Even if you see a high probability setup, decrease position size to account for the added volatility and uncertainty.
- Set wider stops – Give trades extra breathing room by placing stop losses further from your entry point than during the week.
- Watch for reversals – Price gaps or news can quickly reverse sentiment intraday, so watch for signs of weakening momentum.
Properly navigating the forex market open on Sunday evenings requires adjusting your strategies, risk management, and mindset. By trading cautiously and tactically, you give yourself the best chance to start the week successfully.
Friday Close vs. Sunday Open
Friday’s New York closing price and Sunday’s opening price in Sydney often differ significantly due to news and events over the weekend. Traders can take advantage of this by analyzing the differences between Friday’s close and Sunday’s open.
Here are some things to compare:
- Price gaps – Measure the size of gaps up or down and whether they are full or partial gaps. Bigger gaps signal larger weekend news.
- Volume – Volume drops off Friday afternoon before picking back up late Sunday. Monitor for increasing volume indicating a return of liquidity.
- Sentiment – Gauge if the sentiment coming out of the weekend is aligning with or reversing Friday’s tone using metrics like RSI and MACD.
- Major price levels – Look at whether key support or resistance levels were breached over the weekend that might signal bullish or bearish momentum.
- Economic data – Important weekend economic data like Chinese PMI or European CPI can set the tone for pairs like AUD/USD or EUR/USD on Sunday.
Analyzing the forex market’s state at Friday’s close compared to the open gives insight into how news and events impacted sentiment over the weekend. This allows traders to make informed decisions heading into Sunday night trade.
Weekend Risk for Carry Trades
Carry trades – where traders borrow in low yielding currencies and lend in higher yielding currencies – need to be actively monitored and managed over weekends when the forex market is closed.
Here are some of the added risks for carry trades over the weekend:
- Interest rate changes – Surprise rate decisions over the weekend can turn carry trades unprofitable if yield spreads narrow or flip.
- Gapping risk – Price gaps can create large unhedged exposure and margin calls if key support levels break.
- Liquidity issues – Much wider spreads on exotic pairs make closing carry trades difficult over weekends.
- Event risk – Geopolitical and economic turmoil over weekends pose threat of sharp equity pullbacks that unwind carry.
- Gap fills – Carry trades left open can mean missed profits from gap fills reversing profitable swaps.
To mitigate these risks, carry traders should:
- Close out positions before weekends
- Place stop losses appropriately and use guaranteed stops
- Hedge trades through instruments like options
- Reduce position sizes to limit downside exposure
- Avoid holding carry trades into events with binary outcomes
Proper risk management around market closures is key to ensuring carry trades initiated before weekends don’t turn into losses upon reopen.
Weekend Effects in Forex Markets
Some interesting patterns emerge related to returns and volatility when analyzing forex price behavior before weekends versus after. Traders take note of these “weekend effects” when planning trades.
Here are some key weekend effects:
- Pre-weekend drift – Returns tend to be positive on Thursdays and Fridays as positions square ahead of weekend.
- Post-weekend reversal – Prices tend to reverse on Mondays from pre-weekend drift as traders re-enter positions.
- Volatility drops – Volatility tends to be lower on Fridays as liquidity falls heading into the close.
- Gapping increases – Sunday opens are more prone to price gaps than other days as new information gets absorbed.
- Risk-off tone – Uncertainty ahead of weekends pushes traders to safer assets like the yen, dollar, and franc.
By accounting for these general tendencies around weekends, traders can fine tune their strategies. For example, waiting for pullbacks on Monday reverses rather than chasing pre-weekend drift.
Performing Weekend Analysis
While the forex market is closed on weekends, traders can still perform analysis Saturday and Sunday to prepare for the week ahead. Here are productive weekend analysis activities:
- Catch up on news – Scan news feeds to ensure no major developments were missed that could impact markets.
- Study economic calendar – Review upcoming events for the week and how they might affect currency pairs.
- Technical analysis – Look for emerging chart patterns or trend continuations, keeping in mind reduced reliability.
- Fundamental factors – Check for any shifts in important drivers like interest rates, GDP, and fiscal policy over the weekend.
- New trade ideas – Use the distance of the weekend to assess the market with fresh eyes and devise new trade strategies.
- Review performance – Reflect on what went well or poorly in your trading the prior week and develop improvements.
Maintaining some connection to the markets over weekends helps traders hit the ground running Sunday night. By combining catching up on news with chart studies and planning, traders start the week prepared.
Final Thoughts on Close of Forex Market
When the forex market closes on Friday afternoons, it transforms how traders approach managing open positions and initiating new trades. Lower liquidity, higher volatility, expanded spreads, and the risk of price gaps require adjusting strategies. But savvy traders can also take advantage of weekend effects and trade openings tactically.
By understanding the forex market close process and implementing effective risk practices around weekends, traders can avoid unwanted open exposure. At the same time, they can potentially profit from gaps, reversals, and new trends that emerge around forex market closures.