Understanding Forex market liquidity
By Members Desk
March 29, 2022
0:00 / 9:31

So let's talk about, on a say liquidity. Liquidity is an incredible incredibly important factor when it comes not just to, to trading, but actually investing at a very fundamental level. So liquidity really quite simply is how efficiently you can enter a trade. More importantly, however, it's actually how efficiently you can exit a trade for a very important, we need to take our profitability in mind.

We're all out there trying to generate returns and make money from the markets, et cetera. But you also do need to always keep your risks. In the front of your mind and risk is sorry, risk management is actually, what's going to determine your longterm profitability anyway. So let's have a look at these in some more examples.

So how officially you can enter a trade liquidity really at the end of the day is just the amount of buyers and sellers, buyers, and sellers that you have there in the market. Okay. So the more people buying and selling and transacting and more transactions taking place that once again, it's easier for you to get in and easy for you to get out.

So that means that in terms of the efficiency of your entry, you can get better entry prices and therefore you can optimize your short term profitability again. This is going to not just affect your profitability, but also your sorry, your short-term profitability, but also for your longterm profitability, but in terms of getting better entry prices, it's something you're going to notice more so on the short term, in all likelihood, and in terms of how efficiently you can exit a trade.

Again, this comes down to the extremely important concept of. Management. So your ability to get out of the trade when it goes counter to expectations, or if there's some market event that you weren't anticipating, which is quite a common occurrence, of course. Having the knowledge that where you sit your stop loss, where you set your order to get out of the trade is likely to get executed at that price.

With a much higher likelihood that is, is going to be a big benefit to your profitability overall in conjunction with a proper trading strategy, proper entry criteria, and once again, better risk management. And so when we talk about risk management, people don't get too excited about it because it seems, it doesn't seem as exciting as getting out there and chasing the profits, trying to make the money, trying to squeeze as many pips of as we can out of the market, but take it from someone who's been around for a while.

And you can go and ask any professional trader you like about this. But risk management is actually, what's going to determine have a huge effect, crucial effect, I should say, upon your longterm profitability. So always think about that in terms of staying motivated for proper risk management is actually your longterm profitability that you're doing this for.

So liquidity. It's actually determined by two factors that is time availability and size. So liquidity is by definition, your ability to get in and your ability to get out and not just to have a trading position, but as more broadly speaking, more generally speaking of any investment opportunities. So for example, a property in.

Maybe a great investment, but it's not very liquid because it's not very easy for you to get out of stocks. I consider it to be more liquid, much more liquid than some of the other investment products out there. And, but what we want to do now is you want to take a little bit of a comparison of the equities markets versus the currency markets in terms of the size.

So again, liquidity is the term. Time availability and by size. So what we see here is something loosely termed as the $1 trillion club, it relates to the size of global equity markets, looking at the global equity markets around the world. That ha that are at least at one. Dollar mark. So we can see here that the Australian market is trying to security exchange they're down at the bottom right-hand corner does actually make the list, but it's actually the smallest of the top 15 globally.

That's okay. We've got a big country, a small a small population and we're spread out all over the thing pretty much. So we're punching above our weight, but nonetheless, we are the smallest of the top 15 globally. Those of you that have a little bit experienced in the currency. Markets will have some idea where I'm going with this, but in order to actually compare the relative sizes there.

And once again, each of those octagon that you see there are different colors represent. The relative size of the exchanges around the world with the USP and the biggest followed by some of the Asian markets there, Japan and Shanghai followed. Some of the fairly closely followed by some of the European markets there.

Then we have India and Australia down the bottom once again, but looking at the currency market on a relative basis, once again, then we see something like that. So thinking back to the start of this presentation, the global currency market really is the foundation of the global economy. Everything that we do depends on international trade.

International sediments, global interest rates, so on and so on. So you can actually combine all of the world's equity markets, and you've still only got some 10th or so of the global liquidity of the global currency markets. So we're talking about a huge market here and it's not just. Opening in the morning and closing in the afternoon, which is what we see of course, with the equities markets in the case of Australia opening up and up at 10:00 AM and closing at four o'clock in the afternoon.

Most of the exchanges around the world are like that. The currency. On the other hand, simply follows the sun around the world. It's open 24 hours a day and only closes for a portion of the weekend. So it actually closes with the, in the New York afternoon, which is Saturday morning for us and reopens with the New Zealand market very early Monday morning.

Okay. And throughout that time, you've actually got trading opportunities. That you can take advantage of which means that it's great for those of you that do have a nine to five job you're actually working while the stock exchange is working. And then by the time you finish work, it's already closed while the currency market is there for you to take advantage of.

And so that liquidity in terms not just of size, but also time availability does equate. Opportunity. It also allows you to try it with a little bit more leverage or in fact, a lot more leverage and depending on how aggressive that you want to be with your trading and nonetheless, this liquidity and.

Is actually more important from a safety perspective, from a risk management perspective, anyone who's tried to stocks in the past knows that if you're trading a decent size order, you can experience slippage. You can go in for one price and not actually get that price, but end up with something worse and moreover, much more importantly, and more severely you might say is when.

Is when the market closes at four o'clock in the afternoon, and then we get some bad news come out of the commodity markets. We get some bad news come out of London, perhaps, but usually. More more, more often than not it's out of the U S which of course is of course leads to the global economy.

And so the traders on the Australian stock exchange or the Asian exchanges are waking up in the morning and seeing what's happened on the U S markets overnight. And they're factoring that into what they're prepared to pay for their stocks this morning. And so we can see a big difference between what the stock closed at four o'clock today and what it opens up at a tenant.

Tomorrow morning. So this is known as gapping and true to the 24 hour, Monday to Saturday morning nature of the currency markets. You just don't experience that capping in anywhere near the same way. It's effectively trading, continuing. With some exceptions in case of some anomalous events and so forth part in terms of you're getting into a trade and placing a stop loss where you want to get out, it's it allows you to manage your risk much, much, much more effectively.