This time Finex will discuss liquidity in Forex trading.
Of course those of you who have been trading for a long time have heard this term.
For those of you who have just started trading, maybe not. But it is time for you to learn one of the terms that is often thrown around in the trading world.
So what is liquidity in forex trading?
Liquidity in foreign exchange (forex) transactions is considered to be the ability of a currency pair to be traded without having a major impact on its exchange rate.
A currency pair is considered to have a high level of liquidity when it can be easily bought or sold, and there is a large amount of transaction activity for that pair.
Typically, liquidity is calculated by taking the volume of transactions or the volume of transactions currently pending in the market.
Liquidity is a key factor in being able to make profitable trades. Greater liquidity in financial markets facilitates transaction flow and makes prices more competitive.
It can be concluded that liquidity in Forex trading allows traders to make transactions easily, thus affecting the popularity of the market.
Character of Liquidity in forex
Not all currency pairs are liquid.
Currency pairs tend to have different levels of liquidity depending on whether they are major, minor and exotic pairs (or emerging market currencies). Forex liquidity may decrease, for example, when traders move from major pairs to minor pairs, and finally to exotic pairs.
Liquidity also has the peculiarity of measuring how quickly asset buyers can convert cash into tangible assets.
In a highly liquid market, someone who wants to buy an asset that has a fundamental value of $100 will be able to buy that asset immediately for $100, and he will receive the asset immediately.
Liquidity has a huge impact on the level of market volatility.
Lower liquidity usually causes the market to be more volatile and can potentially cause prices to change drastically.
Meanwhile, higher liquidity usually creates a less volatile market where prices don’t fluctuate as drastically.
Volatile markets typically occur when the market rises and falls by more than one percent in a day over a sustained period of time.
High
Relatively high liquidity can be seen in currency pairs that can be bought/sold in significant sizes without large exchange rate differences, for example in Forex trading, large currency pairs such as EUR/USD.
Other major currency pairs that are considered highly liquid are:
- GBP/USD
- USD/JPY
- EUR/GBP
- AUD/USD
- USD/CAD
- USD/CHF
- NZD/USD
Low liquidity
Meanwhile, low liquidity in forex refers to currency pairs that cannot be bought/sold of insignificant size without large variations in exchange rates, for example exotic currency pairs such as PLN/JPY.
The Importance of Liquidity in Forex Trading
If the market is illiquid, it will be difficult to sell or convert assets or securities into cash.
For example, let’s say you have a very rare and highly valuable asset. Let’s say you set the price at IDR 5 billion. However, if there is no market (aka no buyers) for your asset, then your asset is irrelevant because no one is willing to pay.
This means that your asset is highly illiquid.
You may need the services of an auction house to act as an intermediary and find potential interested parties, which can be time-consuming and costly.
Liquid assets can be sold easily and quickly, and cost very little.
submit a fee charged to the merchant for each transaction made.
From the corporate side, companies must have enough liquid assets to cover short-term liabilities such as bills, payroll costs, or to deal with a liquidity crisis, which may lead to bankruptcy.
Conclusion
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