May 19, 2016

Question:What is "Market Liquidity" in Forex Exchange (FX) Market?


Liquidity is the term used to describe what amount of a specific currency pair can be exchanged without significantly changing current offer and demand.

High liquidity means that the potential trade amount has to be very large in order to cause a significant price movement.

Amount of Market Liquidity is different for each market

Liquidity of each currency pair may differ strongly.

The largest liquidity can be found in currency pairs that include currencies of large industrialized nations, such as the USD, EUR, GBP, JPY, CHF and CAD.

The NOK, DKK, SEK, AUD, NZD, SGD form the 2nd tier, their liquidity is fairly good and they can be traded normally, as long as trade amounts do not exceed $100 million equivalent.

‘Smaller’ currencies, such as the THB, TRY, ZAR, SAR, AED but also precious metals Gold (XAU) and Silver (XAU) are freely exchangeable, due to liquidity constraints they may be at risk of much faster and larger price movements.

Some of the smaller currencies could be pegged to another currency, such as the SAR which is fixed against the USD but will float against any other currency that floats against the US Dollar.

More Liquidity with Major Foreign Currencies

The most actively traded currency pairs in the world today are: EURUSD, USDJPY, EURJPY, GBPUSD, USDCHF, USDCAD, EURGBP, together they account for more than 80% of the daily traded volume.

Due to the large amounts that are traded in these currencies by real money, they enjoy wide-spread coverage by economists and analysts.

Trading smaller currency pairs, such as NZDJPY, ZARCHF, USDTRL or XAUGBP may be just as rewarding for a currency speculator.

Given its potential for large movements, risks are higher but so are potential returns.

Standard online FX brokers allow its clients to pick from a list of more than 60 cross currency pairs, encouraging you to take a look at alternatives.

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