What is Liquidity in Forex?
As you have often heard that the forex/foreign exchange market is financially the most liquid market in the world because it is open 24 hours unlike the stock exchange market which is open only for a portion of the day. In the forex market liquidity refers as to how active the market is for the traders. It totally depends by how many traders are actively trading and in what volumes they are trading. Therefore the traders often find the forex market liquid because it is tradable 24 hours a day during weekdays. As the financial centers across the globe open and close throughout the day, the liquidity fluctuates as well. Forex trading occurs in high volumes as there are many traders around the world. Even though it is being liquid in nature, the market profits with $6 trillion turnover each day.
What is Volatility in Forex?
The price in the market keeps falling and rising and the measure of how drastically a market’s price changes are known as Volatility in Forex. The liquidity of the trading market is directly proportional to its’ volatility. For example: Higher liquidity usually results in a less volatile market and lower liquidity results in a more volatile market and therefore because of this relationship the prices thus change drastically. But the price does not fluctuate as drastically when the market is less volatile.
What happens when traders trade simultaneously?
Forex market being liquid in nature tends to move in smaller increments compared to the markets which are non liquid in nature. This means when there are small rise in increments, the liquidity is higher which results in lower volatility. Therefore when traders in the forex market are trading simultaneously usually results in the price making small movements up and down. Sudden drastic movements are also possible in the forex market since the currencies traded are affected by many social, political and economical events. Along with these many other occurrences causes the prices in the market become volatile. Therefore it is a common advice given to especially the new traders in the market that they should keep themselves updated with the latest financial news in order to find potential profit and to better avoid potential loss.
To add further knowledge to your understanding, let us add more potential to our vision as better and smart traders of the forex market. Market volatility is a thing that every trader has to face in order to know the liquidity of the market. When the markets are moving, the trader has to manage the risks associated with it. The trader can look up to brokers as they are an influential source of help. Like it or not, traders often act in herds, therefore market levels might occasionally break violently as too many traders are aware of the market trends around their edges and the competition indeed turns hostile. The key is to find out where you stand as a trader to find the right liquidity in the market.