Were you aware that the forex market is the biggest financial market worldwide?
Well, it is!
Traders from all over the world are trying to get into the market and make their fortune out of it. So, this is not just about you but the millions in the trading world.
When beginning forex trading, it’s crucial to discover its key advantages. Being in the market for a long time is not enough. Entering and exiting from your trading with your favorite currencies like usd / mxn will depend on the institutions and their policies. Researching the market and prioritizing according to the situation is essential.
Here comes the importance of liquidity!
What is liquidity?
When you enter the forex market, you know that you have to decide between the pairs of currencies you want to go for. However, there is no right or wrong; the situation plays the main role in deciding the conditions.
While most currencies are typically highly liquid, that means you can easily trade your financial dreams. However, it will be reliant on financial institutions!
Here, we will focus on the concept of forex liquidity and its importance while dealing with forex pairs.
Identifying Low Liquidity Times
Recognizing low liquidity means the market spread is wide! For instance, during the market opening period, spreads tend to widen from 5 to 20 pips depending on the currency pairs.
- Market Opening: Every Sunday at 5:00 PM New York time
- Rollover Time: At 5:00 PM New York time
- Major News Releases: before the release of significant economic news
These are the particular times when you will find low liquidity measures. So, you should avoid these times by keeping them in mind.
The Forex Liquidity Indicator
The main forex liquidity indicator is “volume”!
It is mainly offered to investors by forex trading brokers. So they can easily assess the market liquidity through volume. This forex liquidity indicator may consider the bars displayed in the chart. This particular volume chart efficiently analyzes the liquidity indicator by interpreting it.
Well, the traders always get the time to approximate the market liquidity.
At some specific intervals, traders can find the volume chart and represent graphs of trades that were executed during the period. This can help the traders follow their previous decisions and make necessary changes according to the volume condition.
The overall forex market liquidity is essential to measure here. If brokers provide their own liquidity data, that is nothing to the overall liquidity.
Apart from that, you can use the individual liquidity data from the forex market as a reference to represent the retail market.
Here, the brokerage size may matter a lot.
Slippage is a common term used in the forex market, which refers to the difference between the expected price of a trade and the actual price at which it was executed. It occurs when the market moves quickly, and the price you expected to execute your trade at is no longer available.
Well, slippage can occur in both directions, either in the trader’s favor or against them. However, slippage is typically seen as a negative outcome as it can increase the cost of the trade and decrease the potential profit.
Why Does Slippage Occur?
Slippage can occur due to many reasons, including:
- Market Volatility
- Order Size
- Execution Speed
How to Manage Slippage?
- Use Limit Orders
- Avoid High Volatility Times
- Use a Reputable Broker
Liquidity Risk Vs. Reward
Retail traders are always in fear of a market crash. The Swiss Franc crisis of 2015 is a prominent example of liquidity risk in Forex.
So, the assessment between liquidity risk and reward should always be there. It will help you to trade with currencies routinely.
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