From a trader's point of view, illiquid market conditions will have chaotic movements or gaps because the level of buying or selling volume at any given moment can vary greatly. A highly liquid market is also known as a deep market or a market that is smooth and price movements are also smooth. Most traders need and should require a liquid market because it is very difficult to manage risk if a trader is on the wrong side of a big move in an illiquid market. Here are three signs to watch for:
Gaps When Trading Forex
Gaps, or differences in forex are different from other markets. However, price differences in forex may occur when interest rate announcements or other news announcements that have a large impact are released against expectations.
Gaps can occur at the opening of trading at the beginning of the week along with Sunday afternoon in the US. If there are news announcements over the weekend, then the overall gap is usually less than 0.50% of the currency value.
Forex Market Shows Little or No Gaps
Markets that take place 24 hours a day such as the forex market are considered to be more liquid or tend to have fewer gaps due to the sustainable nature of the equity market. This allows the trader to enter and exit the market at the trader's discretion. Markets that only trade for a small part of the day such as the US equity market or the Futures Exchange will condense into a thinner market as prices could spike at the open if overnight news comes out against market expectations.
Forex Liquidity Indicator
Brokers often offer a "volume" option on a chart by which a trader can measure market liquidity. This forex liquidity indicator is interpreted by analyzing the bars on the volume chart.
Each volume bar represents the volume traded over a certain period of time, thus providing traders with a suitable liquidity forecast. It is important to remember that most brokers only reflect their own liquidity data and not the overall market liquidity. However, using a broker's liquidity as a measure can accurately represent the retail market depending on the size of the broker.
Time Differences Offer Different Amounts of Liquidity
Short-term traders or scalpers should be aware of how liquidity in forex varies throughout the day. There are less active hours like the Asian Session which are often tied in narrow ranges which means support and resistance levels are more likely to hold from a speculative point of view. major market session moves such as the London and US sessions are more prone to breakouts and larger percentile moves on the day.
The time that lets you see the biggest moves is the US Morning Session as it overlaps the European/London Session which accounts for about +50% of the total daily global volume. The US session alone accounts for about 20% and in the US Afternoon, you will often see a sharp decline in aggressive moves except when the Federal Open Market Committee (FOMC) comes up with an announcement that surprises even if only a few times a year.
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