For many novice traders, the term “Liquidity” is a vague concept of which they have little understanding. Today we will try to fix it. This article will find out what liquidity is in Forex and why you need to pay attention to it during trading.
What is liquidity in the market?
For you to understand, we will explain in simple words, liquidity on Forex is an opportunity to easily buy and sell an asset. The high liquidity of the product indicates the presence of high demand and supply.
Let’s take the iPhone as an example, it’s easy to buy but just as easy to sell at almost the same price. Of course, there will be a difference in price since the phone will no longer be sold, but it will not be so significant. If you try to sell an old cabinet at the same time, it will be on sale for a very long time and will go away only at a reduced price, since the demand for such goods is very low in our time.
Now let’s talk about liquidity in the forex market. Everything here works in approximately the same way, but currencies, stocks, bonds, and so on an act like commodities. If a trader can easily buy and sell an asset, then this means that it is highly liquid. Liquidity is especially important for large market participants, as they may need to liquidate their trades quickly without driving down the value.
Liquidity is important not only for large market participants but also for small ones, as they receive little or no spreads and smooth price changes, which can be seen on the charts. EUR / USD currency is highly liquid. Please note that even on a five-minute chart, quotes move smoothly without sharp jumps and gaps. The following currency pairs are also highly liquid:
Pay attention to the fact that gaps in the price appear on the chart when there is almost no volume in pending deals. In this case, even if someone wants to sell the asset, then there may be no one to acquire it, even though the price has dropped significantly.
There is a misconception among traders that the Forex market is the most highly liquid market in our time. There is some truth in this, but do not forget that high liquidity is not always observed. For those traders who switch to Forex from classical stock exchanges, it will be a pleasant surprise that Forex’s daily turnover exceeds $6 trillion. Such large turnovers are that every day large states and people in business carry out foreign exchange transactions.
Moreover, the most popular currency, oddly enough, is the US Dollar. Transactions with the dollar account for 75 percent of the total money turnover. Many trading instruments are also valued in the American currency, including the prices of oil, gas, precious metals, and so on, which are valued in USD.
Why is liquidity important for traders?
It’s important for traders to know about the liquidity of certain currency pairs as it impacts a lot on the performance of the traders. Traders can enter the trades at highly liquid market hours and buy or sell the currency pairs that have liquidity. This can give them an edge to quickly reach the profit target. On the other hand, if liquidity is low, your trades may need plenty of time to run and reach the target.