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What is Forex Liquidity?

The foreign exchange (forex) market is often described as the world's most liquid financial market, and that's true. But it doesn't mean that currencies aren't subject to varying liquidity conditions that currency traders need to keep in mind.

Liquidity refers to the amount of market interest (the number of active traders and the overall volume of trading) present in a particular market at any given time. From an individual trader's perspective, liquidity is usually experienced in terms of the volatility of price movements. A highly liquid market will tend to see prices move very gradually and in smaller increments. A less liquid market will tend to see prices move more abruptly and in larger price increments.

Forex liquidity is confusing to the new trader. How can a market be seemingly volatile and liquid at the same time? This article will be a primer to understanding just that.
Liquidity by definition is the ability of a valued item to be transferred into currency on demand. When you’re trading currencies or Foreign Exchange, you’re trading a market that is by itself, liquid. However, you are trading based on the available liquidity of financial institutions who get you in or out of the trade of your choosing.

The forex market is considered an Over-the-Counter (OTC), or “Interbank” market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

This means that the spot forex market is spread all over the globe with no central location. They can take place anywhere, even at the top of Mt. Fuji!

The forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations.


Forex market liquidity will vary throughout each trading day as global financial centers open and close in their respective time zones. Reduced liquidity is first evident during the Asian trading session. Japanese data or comments from officials may provoke a larger-than-expected or more-persistent reaction simply because there is less trading interest to counteract the directional move suggested by the news.

Peak liquidity conditions are in effect when European and London markets are open, overlapping with Asian sessions in their morning and North American markets in the European afternoon. Following the close of European trading, liquidity drops off sharply in what is commonly referred to as the New York afternoon market.

During these periods of reduced liquidity, currency rates are subject to more sudden and volatile price movements. The catalyst could be news events or rumors, and the reduced liquidity sees prices react more abruptly than would be the case during more liquid periods.
Money management in forex trading

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