Whenever you read forex articles or watch videos about forex, you may frequently hear these two terms “Liquidity” and “Volatility” or “The Forex Market is or one of the most liquid financial markets globally.” And Of course, if you’re new to forex or new to trading in general, you might ask questions like, “what is this?” “What is liquidity?”, “what is volatility?” or “how come the forex is one of the most liquid in the world.” This article will answer your questions and will share extra knowledge that can help you become proficient in forex trading.
Questions we will be asking today is:
– What is the Forex Market
– What is Liquidity
– What is Volatility
What is the Forex Market?
The forex market is the world’s largest and most liquid market. It is open 24 hours a day, five days a week, and as such, refers to the foreign exchange (Forex) between countries. The forex market trades in all major currencies, including the USD, CAD, GBP, EUR, AUD, JPY, and CNY. More than 150 active currency pairs are available to trade with an average daily volume of over $3 trillion.
However, this traditional finance market has one crucial factor that can make the market appear volatile to many novice traders and investors: price volatility. The volatility of an asset ― how much it changes in value over time ― can be measured by its standard deviation.
Here we have two types of forex market:
The Forex Market has two major types, the interbank and OTC (over the counter). The interbank market is a financial market where large international banks buy and sell currencies with each other. The OTC market comprises smaller, regional banks and brokers who typically don’t have access to the interbank rates.
What is Liquidity?
The Forex Market has high liquidity. This means that many traders are trading in this market, and the trade volume is very high or huge. High liquidity is essential for an individual trader because it ensures that your order will be filled fast and at a competitive price.
In the Forex market, liquidity refers to how easily you can enter and exit a trade. Six factors affect the Currency Liquidity: Size of the market, Depth of the market, Geographical distribution of dealers, Exchange hours Trading rules, Market makers, and Market Size. The first thing you need to look at when determining Trade size is the currency itself. In a nutshell, the higher liquidity the market is, the more volatile it gets.
What is Volatility?
Forex is a volatile market. You could lose money simply because the value of your currencies is so heavily dependent on global events and social unrest. It also has a very long tradition of pump and dump schemes — where large amounts of money are moved fast and often with little regard for fundamentals. Some traders use tactics to profit from these extreme price changes, while others wait for them to occur. Either way, it’s your job to be able to react quickly and intelligently, even if it means disregarding popular wisdom and potential losses!
Volatility is a market’s prices change, and there are three leading causes of price changes in the forex market:
– Changes in demand.
– Central bank’s involvement in the market.
– Individual companies are shaping their products to either benefit or hurt their profits.
In addition, significant changes in the world economy can temporarily disrupt the flow of money in and out of a regional or global market.
To summarize, as I said earlier, the forex market is one of the most popular and most liquid financial markets in the world. It has millions of traders- new and experienced every day, and because of its sheer size, the forex market becomes liquid, and the more liquid it gets *more traders*, the more volatile the market gets. This is why knowing the definition of these terms is essential if you want to become successful in forex trading.