Liquidity's Impact in Forex Trading | forexwikipedia.org

Liquidity?s Impact in Forex Trading

Among other criteria that affect Forex trading is liquidity which commonly refers to how fast investments can be turned into cash. Consider liquidity in the context of Forex trading using the tips below.

Liquidity is often advertised as a great feature of Forex trading because traders can enjoy trading that will get them their money quicker in Forex than other types of trading. This is true because Forex spot trading is based on currencies so it already is currency rather than a stock or some other financial instrument that has to be converted to cash.

Liquidity is frequently reflected by the size of the currency market in which you?re trading. In this context you will pay attention to what are called the crosses in Forex, major and minor. Major trading currency pairs will frequently make up one of the larger crosses and less common currency pairs will be in minor crosses. In terms of liquidity, the major crosses are usually more liquid because there is a larger currency supply in the major markets. For traders this greater liquidity can be represented in tighter spreads, meaning the fees paid for buying and selling currencies will likely be lower than in less liquid currency pairs.

Liquidity can also contribute to Forex dealers changing the spreads on certain currencies. At times there will be reasons that even common currency pairs are subject to less liquidity. In these cases the trader might notice that the spread is greater which means that each transaction will cost a bit more in trading Forex.

Liquidity can be impacted by factors that affect the Forex currency market generally such as news events. If you get accustomed to using some of the technical charts showing currency movements you?ll begin to become accustomed with the types of news events that can change currency prices and liquidity. For instance, economic reporting dates for your currency pairs can impact the pricing of currency as can unexpected news events.

While few people can predict an unexpected cause of a currency change in a particular market, there are many useful resources for examining trends in Forex markets that individual investors use to be alerted to possible situations such as a financial crisis being announced in a country or some kind of political instability that may impact a country?s currency.

Forex trading strategies often suggest following charts that indicate how big financial institutions or governments are making Forex investments. This is not a bad idea for gathering information to use for trading and many Forex traders try to reduce their risk of losses in trading Forex by emulating what bigger institutions are doing. In terms of liquidity, however, this type of strategy can sometimes be problematic.

One drawback of the strategy of emulating bigger institutions occurs for liquidity when an institutional investment amounts to enough currency trading to have an impact on liquidity and therefore an impact on the price of the currency being traded. While no individual trader is likely to impact a country?s currency in terms of availability, some institutional trades can impact the price of trading the currency by making the cost of trading go up because of decreased availability. For this reason some individual investors include two currency pairs that are invested and that move in the same direction, a correlating pair that will not be affected by large institutional trading in another country?s currency.

Some traders look at charts and search for the busiest hours of trading for their currency countries in order to make their trades. This is often a way to make trades using real-time information about a country?s currency. It is this aspect of Forex trading that is advertised as 24/7 trading because you can make trades even if the market for your country is closed. This ability to use 24/7 trading supports liquidity since you are likely to be able to trade before a currency price moves too much in either direction in response to various factors.

Liquidity can be impacted by the software a trader uses for e-Forex trading which means that you will want to research how well your software works in order to best be able to trade Forex. Software that takes longer for trades or crashes frequently or is not updated often enough can result in a Forex trader reducing the liquidity of his or her trades due to an inability to make the trades.

Liquidity is an often-advertised feature of Forex trading that can be used by individual investors. Consider the tips above to incorporate some ideas about liquidity into your Forex trading.

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Source: http://www.forexwikipedia.org/articles/liquiditys-impact-in-forex-trading

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