An Explanation Of Forex Liquidity For Retail Traders

by Pam on September 8, 2017

What is liquidity?

The Forex market is the largest market of the financial world. As long as human beings are not traveling to other planets, this market will rule in the world of finance. Today, we are going to talk about Forex market liquidity. Before we go further into our discussion of liquidity, it is important to give the readers a bit of an idea of liquidity. Liquidity refers to how easy it is to convert an asset into money. For example, when you are trading in the Forex exchange market or commonly known as Forex, you can trade with various currencies. You can choose to trade the market with oil, gold and also with a normal form of currency of various countries. No matter what currency you are trading or if you are into the gold and oil market, you can always convert your assets to your national currency or your desired currency any time.

Without liquidity, no one would be able to make money. Many professional brokers like Saxo have learning centers like Saxo Academy which gives an illustration of the importance of Forex liquidity. The more liquid the financial asset becomes the better chance you will have to make money. However, in order to make a profit in such a high liquidity market, you need to work hard to develop your trading skills. If you place random orders just like the new traders in the online trading community then you will never understand the perfect way to trade in this market. Success in this industry comes with strong perseverance, devotion, and dedication.

Is liquidity bad for the market?

Liquidity, to some extent, is not only good but also necessary for the Forex industry to function in the financial sector. If you have money in your account but you have got no signal or movement of price in the Forex market, the money will be of no use. The Forex market largely depends on  market liquidity. As hundreds of millions of buyers and sellers are taking part in this investment sector, this market sees an exchange of 4 trillion dollars per day. This amount of money is very large and this is why the currency pairs of foreign currencies are always exchanging. There is no fixed rate and you can make your profit when you have figured the market out. But in order to find the best possible trade setup, you need to learn how the liquidity of this market works. Without learning all the details you will be losing money in the financial industry. So before you trade in high volatile markets use a demo trading account to master the art of trading

But liquidity can also be bad for the traders. For example, think of the market volatility that occurs when there is a news release or any events in the financial and investment world. The market becomes more liquid, people are investing more money and converting their assets into a form of money within seconds. The scalpers mostly take advantage of market volatility, but the common traders cannot. If they try to trade in this volatile market, they will lose all their money along with their capital. Liquidity is just an attractive factor which gets thousands of new traders to invest into this market every day. You need to follow your own plan to make money in this liquidity and market volatility. The number one cause of losing money during high volatile market conditions is not using money management. No matter how reliable the trading signal is, you must trade the market with a proper risk management plan in place so that you lose a small portion of your account capital if the trade goes against you.

Conclusion

Retail trading can be extremely difficult for new traders. You need to understand the nature of this market in order to find the best trading signals. Always focus on trend trading and keep your trading system simple. If you are new to this industry then learn the art of trading using a demo account before risking your hard-earned money.

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