Liquidity is the fundamental factor that charms traders from across the globe. Predominantly, it is the pre-eminent perk of trading in the forex market. As per the report published by an esteemed bank, the forex market accounted for $5.1 trillion in liquidity in 2016 and is likely to fly high in the coming years.
The availability of liquidity in the market makes it easy for traders to access it. However, the liquidity gets afflicted on certain occasions that the traders must consider before investing a significant chunk of money. Besides, it is crucial to understand the core meaning of liquidity. The forex broker hycm review help you to understand the term liquidity in detail.
What is Liquidity?
- In a general sense, forex liquidity refers to the ability of a currency pair to be easily bought and sold without causing any significant impact on its exchange rate.
- A currency pair is highly liquid when more market movements are recorded of that pair, and therefore more transactions occur.
- The presence of liquidity allows the currency rates to be more competitive.
- Besides, the liquidity also significantly impacts the comprehensive forex market.
Who Offers Liquidity to the Forex Market?
- Liquidity Providers
Liquidity providers are responsible for providing liquidity to the forex market. Typically, liquidity providers are the monetary institutions or brokers who work simultaneously from both ends of transactions.
- Market Participants
Furthermore, multiple market participants offer liquidity to the forex market. Market participants include different financial institutions, commercial banks, investment banks, forex brokers, overseas investment managers, retail traders, and wealthy individuals.
- Tier 1 Liquidity Providers
Tier 1 liquidity providers are the significant investment banks that trade forex instruments on a large scale. They also provide quotes for the currency pairs. Additionally, they also account for several other services.
Video Credit – FXOpen Official
Importance of Liquidity in the Forex Market
The forex market is called the most liquid market; thus, the entire concept of liquidity holds a significant value in the market. Here are some points that justify the importance of liquidity in the forex market:
1. Alluring rewards
A forex market is where traders are bombarded with excellent discounts and lucrative deals. However, great deals are only possible due to extreme liquidity. Therefore, it is the way traders get better discounts and profitable deals.
2. Price stability
A liquidity provider will ensure extensive price stability by taking a better position in forex pairs. It later gets offset with a different market maker or aggregated to the market maker’s book. The book contains the forex pairs to be liquidated at a later stage.
3. Forex market makers
The traders don’t get direct access to tier 1 liquidity providers. However, some high-profile forex brokers have access to tier 1 liquidity providers, so the traders gain more liquidity for their currency pairs and other forex holdings.
Types of liquidity
Generally, liquidity is of two types in the forex market. These are mentioned as follows:
High liquidity is used for the currency pairs that can be easily exchanged without affecting the overall exchange rate. For instance, EUR/USD is the best example of high liquidity. The exchange of this currency does not cause much variance in the price level.
Low liquidity, on the other hand, is different from high liquid currency pairs. The currency pairs with low liquidity cannot be bought and sold in significant sizes. For instance, PLN/JPY is an ideal example of less liquid currency pairs.
Other Markets and Forex Market Liquidity
- Compared to other markets, the forex market is the most liquid. Typically, trading bonds, stocks, and other financial instruments on the stock market are less liquid. Besides, many financial markets don’t operate regularly; therefore, they are less liquid, and the traders are less likely to receive economic benefits.
- Furthermore, there is a significant difference in the overall margin and leverage requirements of the stock and forex markets. The stocks are traded with a margin requirement of 20 per cent, while on the other hand, the forex market securities get leverage of 500. Hence, more liquidity prevails in the forex market compared to the stock market.
The Bottom Line
Therefore, in a nutshell, it is fitting to mention that the forex market is the ultimate leader in liquidity. The market is highly liquid and thus manages to allure several traders worldwide. Liquidity also makes way for several profits for the traders, making them encounter more profitable deals.