The Importance of Liquidity in Trading

When a trader starts trading forex, one of the first advantages they may encounter is how much liquidity the forex market offers compared to other markets. Liquidity in the forex market is by definition the ability of a currency pair to be traded (bought/sold) on demand. When traders trade major currency pairs, traders trade very liquid markets. However, traders trade based on available liquidity from financial institutions that allow traders to enter or exit the trade (currency pair) that the trader chooses.

Not all currency pairs are liquid. in fact, currencies tend to have varying degrees of liquidity depending on whether the pair is major, minor or exotic (including emerging market currencies). Liquidity often dries up as traders move from major currency pairs to minor pairs and finally to exotic pairs.

High Liquidity:

High liquidity in forex refers to currency pairs that can be bought/sold in significant sizes without a large difference in their exchange rates (price levels) – for example, a major currency pair such as EUR/USD.

Other highly liquid major currency pairs to watch out for:

• GBP / USD

• USD/JPY

• EUR / GBP

• AUD / USD

• USD / CAD

• USD / CHF

• NZD / USD

Low Liquidity:

Low liquidity in forex refers to a currency pair that cannot be bought/sold in a significant measure without large variations in its exchange rate price. For example, Exotic currency pairs such as PLN/JPY.


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