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What is Forex Liquidity?
Liquidity can be defined as the extent to which an asset can be bought or sold on the market, and this includes how easily and how quickly it can be done, without having a considerable impact on its price.
Investors place importance on liquidity as they can ascertain how quickly they can recuperate the cash value of that asset, as well as how easily they can profit from trading it.
The level of liquidity of assets varies as it depends on the particular asset and related factors. An asset is considered to be liquid is one that is always at the ready to be converted into cash since there are many buyers willing to buy it.
On the other hand, an asset is considered to be relatively illiquid if there are not that many potential buyers willing to buy it, and in case one manages to sell it there is going to be a considerable reduction in its price. This is attributed to uncertainties with regards to its value as well as a lack of market interest in trading it regularly and easily.
Currencies are considered to be liquid. However the level of liquidity varies according to the type of currency. In fact currencies are often categorised by their liquidity levels.
- Major currencies are very popular. Thus they are very liquid and can be traded easily and quickly with low spreads. Some major currencies include the US Dollar, the Euro, the Japanese yen, the Australian dollar and the British pound.
- Minor currencies are relatively liquid too, but definitely not as much as the major currencies since they do not involve the USD.
- Exotic currency pairs lack market depth and are traded at low volumes. They are illiquid as they are not in demand. Examples include the Thai Baht and the South African Rand.
Liquidity affects the trader in various ways. For starters, most currency traders will want to stick to major currencies, and possibly, minor pairings, since these are easier to trade and spreads are low. The trading strategy needs to take into account liquidity. Experienced traders may still give a go at exotic currencies as long as they are confident enough with their strategy, but naturally they will need to trade different assets as well.
The more liquid an asset is, the better, since there is a slim chance that the trader will end up trapped in a position where the price falls dramatically and there are no buyers to whom he can sell.
The most basic measure of an asset’s liquidity is the bid-as spread. When the spread is small it means that there is enough liquidity. On the other hand, when the spread is wide, the asset may not be that liquid.
Investors place importance on liquidity as they can ascertain how quickly they can recuperate the cash value of that asset, as well as how easily they can profit from trading it.
The level of liquidity of assets varies as it depends on the particular asset and related factors. An asset is considered to be liquid is one that is always at the ready to be converted into cash since there are many buyers willing to buy it.
On the other hand, an asset is considered to be relatively illiquid if there are not that many potential buyers willing to buy it, and in case one manages to sell it there is going to be a considerable reduction in its price. This is attributed to uncertainties with regards to its value as well as a lack of market interest in trading it regularly and easily.
Currencies are considered to be liquid. However the level of liquidity varies according to the type of currency. In fact currencies are often categorised by their liquidity levels.
- Major currencies are very popular. Thus they are very liquid and can be traded easily and quickly with low spreads. Some major currencies include the US Dollar, the Euro, the Japanese yen, the Australian dollar and the British pound.
- Minor currencies are relatively liquid too, but definitely not as much as the major currencies since they do not involve the USD.
- Exotic currency pairs lack market depth and are traded at low volumes. They are illiquid as they are not in demand. Examples include the Thai Baht and the South African Rand.
Liquidity affects the trader in various ways. For starters, most currency traders will want to stick to major currencies, and possibly, minor pairings, since these are easier to trade and spreads are low. The trading strategy needs to take into account liquidity. Experienced traders may still give a go at exotic currencies as long as they are confident enough with their strategy, but naturally they will need to trade different assets as well.
The more liquid an asset is, the better, since there is a slim chance that the trader will end up trapped in a position where the price falls dramatically and there are no buyers to whom he can sell.
The most basic measure of an asset’s liquidity is the bid-as spread. When the spread is small it means that there is enough liquidity. On the other hand, when the spread is wide, the asset may not be that liquid.