Forex is a huge niche in the global markets place. Statistics on traded volumes are not calculated by location but on a worldwide level. Forex liquidity tells us that more than $ 4 trillion is traded daily in this market.
The exceptional Forex liquidity
We carried out a comparison of the respective Forex liquidity and the total sum of the liquidity of the stock markets in the world.
It is mostly in favour of the currencies market. The three most tradable currency pairs are the EUR/USD, the USD/YEN and the GBP/USD. This research also tells us that the current liquidity on the EUR/USD is higher than the total liquidity of the equity markets.
The liquidity of the foreign exchange market is significant and we can consider it as a real advantage for traders who can very quickly buy or sell.
Understand how Forex liquidity works in the markets
The Forex market often has the reputation of the most important financial market in the world concerning volume. It's more than $ 4 trillion in transactions per day. It is also the most liquid market.
The liquidity conditions of the Forex market should be taken into account by any trader speculating there.
The volatility with which the prices of different Forex currency pairs move determines the amount of liquidity. In a market like that of Forex including many price variations, the trends are growing, and liquidity is directly proportional to it.
When liquidity decreases, price changes occur quickly, and price increments are higher. The liquidity in the Forex market is continually changing. And it is strongly dependent on the opening and closing hours of the leading financial centres in the world.
By way of example, liquidity is often reduced during the Asian session, whereas the Forex market reaches its maximum liquidity when the European (London) session is held at the same time as the American session (New York).
That is to say between 14:00 and 17:00 Paris time.
Forex liquidity features
The causes of liquidity in the Forex market are many:
- Announcements on the economic calendar
- The crucial speeches
- The political events or merely rumours.
Note that holiday periods and other holidays may also affect liquidity. It is normally lower.
Many traders use different Trading Strategies and styles depending on the liquidity level.
The most common trading strategies are:
Scalping, day trading or swing trading are used by traders differently on the Forex market during periods of low or high liquidity. Short-term investors enthusiasts tend to be more aggressive when volatility is low.
Meanwhile, day traders or swing traders may tend to respond in the same way with higher liquidity. It is essential to check the liquidity of the market before taking a position.
It is indeed vital to do so, to avoid significant price discrepancies or avoid certain pitfalls (trend reversal, false break).
We usually consider markets such as Forex, which works for 24 hours, more liquid. That is because you can enter and exit a trade without problems.
A market that trades only part of the day as the stock market has the consideration of narrower, shallower liquidity, since the price may jump or fall at the opening of the US session.
For example, if there is important news during the European session, the market might go against the expectations of the American traders.
Gaps in the Forex market?
Fluctuations in the foreign exchange market are different from those in other markets. However, price changes can occur within Forex if a monetary policy announcement or other shocking announcement goes against expectations.
Besides, variations can occur at the opening of the week (Sunday evening in Europe) if an announcement occurs during the weekend. But overall, Forex variations are generally less than 0.50% of the value of an exchange rate.
It is possible to issue execution orders as long as the market is open, which will be executed as soon as the cash provider has a price that suits you.
The amount of cash exchanged varies according to the time of day.
If you are a short-term trader like a day-trader, you must take into consideration the notion of liquidity in the Forex market, since it depends on the hours of the day.
European currencies are generally less active during the Asian session and vice-versa. On the other hand, during the European and American sessions, the movements are much larger and are therefore more likely to generate breaks and higher volatility.
Forex market schedule
The most likely time of the day for more significant movement would be an early afternoon session in Europe. Also, it straddles the first hours of the American session.
This overlap of the European and US session (from 15:30 to 17:30 French time). Represents about 50% of the average daily volume on the Forex Market.
The American session alone represents around 20%. And during the end of the US session, you will often see a sharp decrease in movement, except when the Federal Open Market Committee (FOMC) has a surprise announcement, which only happens a few times a month.
Forex Liquidity and final thoughts
Maybe you are new to the Forex market. Or perhaps you come from another market. However, Forex opportunities present in this market are exceptional. You will be able to trade 24 hours a day.
And this liquidity, which ensures very fluid changes in prices, allows for an excellent technical analysis. Whatever your background, we advise you to start your Forex trading adventure with our Forex trading initiation guide.
Our Webinars presented by a Markets Specialist. As well as building a trading plan on this market can comply with your personality and availability much more accessible than in most other markets.