The Importance of Liquidity in Foreign Exchange Trading

 

One of the first benefits of forex trading that a trader is likely to encounter is the forex market’s greater liquidity than other marketplaces. According to the 2016 triennial report of the Bank of International Settlements, the most recent estimates show a daily traded volume of around $5.1 trillion.

WHAT IS IT, AND WHY IS IT IMPORTANT?

It refers to a currency pair’s capacity to be exchanged (bought/sold) on demand in the forex market. When you trade the most significant currency pairings, you do it on a very liquid market. However, you trade using the financial institutions’ available liquidity, which allows you to enter or exit the transaction (currency pair) of your choice.

Not every pair of currencies is liquid. In actuality, currencies’ liquidity tends to fluctuate depending on whether they are major, minor, or exotic pairings (including emerging market currencies). Forex liquidity decreases as traders go from major to minor pairs, then to exotic pairs.

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