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Liquidity & Volatility in Forex

It is often said that the forex market is the world’s most liquid financial market, and it is. But what does that mean for you and your forex trade?

What is liquidity?

Liquidity refers to how active a market is. It is based on the number of active traders and their total trading volume. With a daily turnover of almost US$6 trillion, forex is indeed a thriving market. The reason why it enjoys such high liquidity is because it is tradable 24 hours a day on weekdays. Even though liquidity fluctuates as financial centres around the world open and close throughout the day, forex trading volume usually maintains at a relatively high level at all times.

What is volatility?

Volatility is the indicator of a market’s price change level. How liquid a market is has a huge impact on the volatility of the market price. Lower liquidity results in a more volatile market and cause drastic price changes. Higher liquidity creates a less volatile market where prices are relatively more stable.

Liquid markets such as forex tend to rise in smaller movements, as high liquidity results in low volatility. At the same time, a large number of traders results in subtle fluctuations in price. However, drastic and abrupt movements are also possible in the forex market. Since currencies are affected by political and socio-economic events, prices may become volatile due to various factors. Traders should pay attention to current events and keep up with financial news in order to discover potential profits and better avoid potential losses.