When you are trading in forex you probably want to know what is liquidity in forex trading. We will help you to learn more about liquidity.
In forex, many terms involve for trading. Liquidity is one of them which is considered valuable term and trader must know about it. it is refer to how quickly the currency is sold in stable price. The asset could be financial or real. Financial asset is one that involve cost such as stock where as real asset is commercial building.
This term is also used as how quickly the buyer convert is asset into cash. Such as if the value of asset is $100 and buy it at $100 and instantly sold it to $100.
WHAT IS LIQUIDITY AND WHY IS IT IMPORTANT?
The term liquidity is described as how fast a currency pair is traded and its value should be stable. There are major currency pairs in the market which have high liquidity in the market. In other word the value of in and out of asset should be same and it should be traded instantly.
All currency pairs are not liquid. But the value of liquidity depend on the level of liquidity. The liquidity depend on the pair. The major pairs involve high liquidity whereas minor pairs have low liquidity. So the value of liquidity on each currency pair is different.
High liquidity is described as the currency pair that is buy or sell but its value is not increased or decreased much. Such as EUR/USD is the major currency pair and it also involve high liquidity. There are many other currency pairs which have high liquidity. These are as follow:
Low liquidity could be described as currency pair which is not buy or sell and there prices are also not fluctuate. Exotic usually have low liquidity and cant brought or sold. Such as PLN/JPY is a low liquidity pair.
Why Is Liquidity Important?
Liquidity is very important because if there is no liquidity then assets will not brought or sold and cant generate cash. For example, if you have a currency and there is no liquidity in the market then there will no appraised value for this and the asset become illquid.
But if there is liquidity then the assets will be buy or sold in a appraised value. Everybody hold asset that need to brough or sold. Such as bills and payroll are paid if a company have liquid assets. Otherwise they have to face crisis which could also lead to financial downturn.
What Are the Most Liquid Assets or Securities?
Cash is considered iquid asset because it will easily and quickly buy or sold. Many markets, deposits and CDs need cash deposits. Other liquid assets are bonds and stocks that could easily sold through a broker. Gold is also a liquid asset and it can easily turned to cash. ReviewFX (Pty) Ltd gives more information about liquidity.
How to use liquidity in trading
Liquidity is also used in trading such as forex market is a liquid market where currencies are liquid which is needed before any position is open or closed. If there is low liquidity then currencies risk will be increased. Volatility is opposite to liquidity because closing a position will be difficult if liquidity is high.
One thing that should be considered about liquidity is that it is not a fixed value rather it is dynamic value that is changed constantly. The value of liquidity depends on many factors such as it depend on time frame and volume of trading.
If the trader is not following market hours then he will face low liquidity as compared to the participant who trade in time frame. Such as if a trader is following Asian hours then CHF currency will have low liquidity. But if the trader is following European hours then liquidity will higher. Forex is a liquid market because volume and frequency of trading is high.
Liquidity is an important term in trading. Because if there is no liquidity then it will hard to buy or sell currency. Major pairs have high liquidity which are easy to trade where as exotic currency pair have low liquidity which make it difficult to buy or sell any currency pairs. So major currency pairs are easy to trade.