When people talk about Forex trading, two of the most common terms we hear are liquidity and volatility. But what are they exactly? Let’s take a closer look.
Liquidity is the measure of a market’s activeness. A market’s liquidity or activeness is dependent on the volume of trades and how much traders are trading.
The reason behind the Forex market’s seamless liquidity is because of its round-the-clock activity. It operates 24/5.
The Forex market has different trading sessions. Therefore, the varying opening and closing of financial centers all over the world could affect the market’s liquidity. It could fluctuate in a dizzying manner.
Despite this, a relatively high volume of Forex trading can always be seen, and it is evident with its $6 trillion turnovers each day. Yes, each day.
Volatility, on the other hand, is the measure of how fast a market’s price changes. The volatility of prices comes from the big influence of the market’s liquidity.
The degree of a market’s volatility affects its volatility, and in turn, affects its drastic price changes.
Commonly, what triggers a volatile market is lower liquidity. It’s what causes prices to change drastically. On the other hand, a less volatile market is pushed by higher liquidity, that results in gradual fluctuations.
One reason why Forex’s advance tends to be smaller is its lower volatility, which is caused by high liquidity. With traders dipping their cash all at the same time, it somehow clogs the price movements up and down.
But since currencies are affected by economic, social, and political events, Forex’s slow pace may possibly turn into sudden and drastic changes.
With this, traders should be aware of the factors that affect the market. In that way, they can take advantage of possible opportunities and avoid costly losses. They will be able to trade with prudence, patience, and wisdom in mind.