Why is FX Liquidity Important in Forex Trading?

The foreign exchange market is the backbone of global trade and international investments. According to Alan Safahi, an experienced entrepreneur and a leading startup founder in San Francisco, individuals, and businesses must understand the significance of FX liquidity for three reasons:

· The average trading volume daily is $5.4 trillion, making foreign exchange the world’s second-largest market.

· Forex trading plays a substantial role in guaranteeing efficiency and no-arbitraging conditions in stocks, bonds, and derivatives.

· Forex trading has an over-the-counter (OTC) nature characterized by market heterogeneity, and fragmentation, causing unprecedented liquidity patterns.

Importance of Liquidity to Forex Traders

According to Alan Safahi Orinda, the forex market is a decentralized international market and has no physical location because currencies’ selling and buying occurs electronically, mainly between banks. However, other participants, such as pension funds, hedge funds, investments, insurance companies, and corporations, also play crucial roles in forex trading.

Safahi says that most forex traders do not understand the concept of FX liquidity. It is crucial to comprehend this concept to streamline your trading operations. The successful entrepreneur and an expert in forex trading “Alan Safahi” says that liquidity refers to the current demand for a product or service.

In financial markets, liquidity refers to the quick conversion of a specific device into cash, physically or electronically. For instance, short-term U.S bonds and gold are a few instruments with higher liquidity rates. Traders buy and sell these instruments throughout the world rapidly after reaching an agreement at a reasonable price.

Volume Option

According to Safahi, brokers often offer a volume option, allowing the trader to measure the liquidity amount on the market. The volume option is determined by analyzing different bars on the volume charter. Bear in mind that each volume bar represents the traded amount, giving traders the volume liquidity’s approximate values.

High and Low Liquidity

Alan Safahi recommends focusing on high liquidity in the forex market. It refers to a currency pair that you can buy and sell in significant sizes without significant variances in the exchange rates or price levels. According to Safahi, traders must focus on major currency pairs, such as:

· EUR and USD

· USD and GBP

· AUD and USD

· USD and CHF

· USD and NZD

· EUR and GBP

· JPY and USD

On the other hand, low liquidity in the foreign exchange market refers to a currency pair that you can’t purchase or sell in significant sizes. Alan Safahi gives an example of exotic currency pair, the PLN, and JPY.

Look for Signs

Alan Safahi recommends looking for various signs to determine the market liquidity. The first one is figuring out gaps when trading forex because they vary compared to other markets. Bear in mind that price gaps occur in the foreign exchange market if high-impact news or interest rate announcements are against expectations.

Another thing you need to consider is the volume option offered by brokers on the chart. Using the chart, you can measure the market liquidity and interpret the FX liquidity by analyzing different bars on the volume chart.

Moreover, if you are a short-term trader or scalper, make sure you are well-aware of varying liquidity through the trading day. Bear in mind that the US session and London session are major moving market sessions highly prone to large percentiles moves and breakouts on the day.

Final Words

Liquidity is a foreign exchange market that refers to how fast traders can convert their investments into cash. Safahi recommends understating the concept of liquidity and learning ways to measure and analyze FX liquidity to get the most out of your trading.

Originally Posted: https://safahi.com/why-is-fx-liquidity-important-in-forex-trading-bd4723a89232