Liquidity describes the degree to which an asset can be quickly bought or sold in the market. In other words, the ability of a currency pair to be traded on demand.
In the Forex market, the daily traded volume can reach as high as $6 trillion. Hence, it is safe to say that the Forex market has the highest liquidity. This is one of the many benefits that traders would come across when trading in the financial market.
How does it work?
For instance, a fruit seller has a lot of apples ready to be sold in the market. With high liquidity, all the apples can be sold within a short period of time. Meaning that the supply and demand is high, there are many buyers and sellers ready to buy and sell apples.
On the other hand, when the liquidity is low, the fruit seller has to spend longer time in the market to sell his apples, even lowering the selling price to attract more customers. Lack of transactions like this signify low liquidity, causing sellers or buyers fail to make a deal in a short period of time.
Market liquidity is prominent for many reasons, especially the ease it brings to traders in trading. On top of that, liquidity also ensures traders get to buy or sell with the price they desire and lower the possibility of slippage.
To finalize, liquidity pertains to a currency pair’s ability to be bought or sold within a short period and without causing a significant change in its exchange rate. To enjoy high liquidity, traders are advised to trade on major currency pairs such as EUR/USD or USD/JPY that have relatively higher demand in the Forex market. Trade on specific times like the US morning session to make sure you catch most of the market movement and utilize market liquidity thoroughly.