What Is Liquidity and Volatility in Forex and How Do They Work?

In forex, Liquidity and Volatility are two popular terms you’ll need to get familiar with. The liquidity and volatility in the Forex market are two factors that indicate the market status. A trader who has enough knowledge on both liquidity and volatility has the benefit of trading wisely and making profit by narrowing the losses. 

Liquidity in Forex

You must have heard the word Liquidity so many times in economic terms. Liquidity in general terms actually means how quickly you can get your money back against your asset. But in forex trading or any other trading liquidity refers to how much money is flowing in the market at any given time. 

How Liquidity affects the Forex market

Liquidity in Forex actually means how active the market is. It also portrays the participation of traders and their collective volume. The forex market has a daily turnover of almost $6 Trillion whereas the second-largest trading market New York Stock Exchange(NYSE) has a daily turnover of roughly $230 Billion.

As the Forex market has the maximum operational time it gets the benefit of having high liquidity. The liquidity in forex also depends on the currency state. Most traded currency pairs(EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CAD, USD/CHF, NZD/USD) which are also known as major currency pairs are higher in liquidity. While exotic currency pairs, such as USD/HKD, EUR/TRY, GBP/ZAR are low in liquidity. 

Volatility in Forex

Volatility in forex is the fluctuation of currency in the global currency market. The currency rates may fluctuate from hour to hour, minute to minute or even second to second. There are many factors that can force the market to be volatile. 

How Volatility affects the Forex market

To make money from any trading market, the change of price is a must. Likewise, Volatility in Forex is a good sign, it enables the traders to make more profit out of the market.

But the more volatile market can cost more losses too. If you can do good risk management, you can use the volatility in your benefits and minimize the losses.

The Relationship Between Liquidity and Volatility

The liquidity and volatility of a market have a significant influence on how volatile its prices are. If the market has low liquidity, it would eventually be more volatile with a sudden big marginal change of prices.

As the forex market is high in liquidity it is less volatile and as a huge number of traders are trading at the same time, the movement of the price is very stable here. Even though forex is less volatile, traders in the forex market should always be aware of the political scenario of major countries before making any move to the market as the unrest in the political scenario may affect the volatility. 

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