Liquidity describes how easily an asset can be bought or sold without causing a significant change in its price. In simple terms, it refers to how many buyers and sellers are active in the market at any given moment and how smoothly trades can be executed.
This matters because the forex market is the most liquid financial market in the world, with more than USD 7.5 trillion traded daily in over-the-counter transactions. However, liquidity is not evenly distributed. Some currency pairs trade with deep liquidity and tight spreads, while others experience thinner conditions that can make trading more difficult and costly.
Many traders notice that spreads widen, execution feels slower, or price suddenly jumps at certain times of day. The key reason is liquidity. Liquidity levels vary by currency pair, trading session, and market conditions, and these changes directly affect execution quality, price stability, and trading costs.
For this reason, understanding how liquidity works in forex, and how it can be measured, helps traders better interpret market behaviour and adapt their trading approach to changing conditions.
What Is Liquidity in Forex?
Liquidity in forex refers to how easily a currency pair can be bought or sold without causing a noticeable change in price. In forex trading, liquidity means there is a sufficient number of buyers and sellers willing to trade at or near the current market price.
The core principle is simple: the more active participants there are in a currency pair, the more liquid that market becomes. High liquidity allows trades to be executed quickly and efficiently, while low liquidity can result in slower execution, wider spreads, and unexpected price moves.
In practice, liquidity is closely linked to the popularity of a currency pair and the time of day it is traded. Major pairs such as EUR/USD tend to be highly liquid because they attract consistent interest from banks, institutions, and retail traders around the world. As a result, these pairs generally offer smoother trading conditions and lower transaction costs.
This is why liquidity is not just a market concept, but a key factor that directly shapes how traders experience the forex market on a day-to-day basis.
Read more:What Is Forex? 7 Steps to Learn How It Works & Start Trading
Types of Liquidity in Forex
High Liquidity
High liquidity in the forex market means there is a large number of buyers and sellers actively trading a currency pair at any given time. To put it simply, trades can be executed quickly, in size, and without causing significant price movement.
The key reason high liquidity matters is because of equality. When liquidity is strong, orders are filled faster, spreads are tighter, and prices tend to move in a more orderly and predictable way. This is why most professional traders prefer operating in highly liquid markets.
In practice, high liquidity is most commonly found in major currency pairs, especially during active trading sessions such as the London and New York overlap. These pairs attract constant interest from banks, hedge funds, corporations, and retail traders, which keeps trading volume high throughout the day.
Examples of typically high-liquidity forex pairs include:
EUR/USD – The most traded currency pair globally, known for deep liquidity and consistently tight spreads
USD/JPY – Highly liquid due to strong participation from Asian and US institutions
GBP/USD – Very active during London and New York hours, often combining liquidity with volatility
USD/CHF – A major pair with safe-haven characteristics and steady institutional flow
AUD/USD – Popular during the Asian session and influenced by commodity demand
USD/CAD – Closely linked to oil prices and North American trading activity
NZD/USD – Liquid, though slightly thinner than AUD/USD, particularly outside Asian hours
Advantages of high liquidity:
Faster trade execution
Narrower bid–ask spreads
Lower slippage risk
More reliable technical price levels
Disadvantages of high liquidity:
Smaller average price moves
Fewer extreme volatility opportunities
As a result, high-liquidity markets are generally best suited to scalpers, day traders, and anyone who values consistent execution and lower trading costs.
Low Liquidity
Low liquidity in the forex market occurs when there are fewer buyers and sellers active at the same time. Put into simple terms, this means trades are harder to match, and prices can move more sharply in response to relatively small orders.
The key issue with low liquidity is uncertainty. When trading activity drops, execution becomes less predictable, spreads widen, and price can jump between levels rather than move smoothly. This is why low-liquidity conditions often feel more volatile, even if overall market volume is low.
In practice, low liquidity is most commonly seen in exotic or less frequently traded currency pairs, as well as during off-peak trading hours such as late New York or rollover periods. During these times, fewer institutional participants are active, which reduces market depth.
Examples of typically low-liquidity forex pairs include:
USD/TRY – Sensitive to regional risk and policy changes
USD/ZAR – Prone to sharp moves during risk-off periods
EUR/SEK – Lower participation outside European hours
USD/MXN – Can be liquid at times but thins quickly outside US hours
Advantages of low liquidity:
Potential for larger price movements
Short-term trading opportunities for experienced traders
Disadvantages of low liquidity:
Wider bid–ask spreads
Higher slippage risk
Slower or partial execution
Less reliable technical levels
For this reason, low-liquidity markets are generally more suitable for experienced traders who understand the risks and adjust position sizing accordingly.
Read more:What is a currency pair? Definition, types, and examples
High Liquidity vs Low Liquidity in Forex (Comparison Table)
The difference between high and low liquidity comes down to how active the market is and how easily trades can be absorbed. The next table highlights how liquidity levels affect key aspects of the forex trading environment.
Category
High Liquidity
Low Liquidity
Market characteristics
Deep, active, and efficient markets
Thin, fragmented trading
Market participants
Banks, institutions, funds, retail traders
Fewer active participants
Trading volume
Very high and consistent
Low or sporadic
Execution speed
Fast and reliable
Slower and less predictable
Trading conditions
Stable, orderly price action
Erratic and jumpy price action
Advantages
Tight spreads, low slippage, smooth execution
Larger potential price moves
Disadvantages
Smaller average price ranges
High costs and execution risk
Currency pair examples
EUR/USD, USD/JPY, GBP/USD
Exotic and minor pairs
Overall market environment
Transparent and efficient
Unpredictable and risk-prone
As a result, traders operating in high-liquidity environments generally experience lower costs and more consistent execution, while low-liquidity markets demand stricter risk management and greater experience.
Read more:Forex risk management: 10 tips to manage 6 key risk types in trading
Why Liquidity in Forex Matters？
Liquidity plays a central role in how the forex market functions and how traders experience it on a practical level. Put simply, liquidity determines how easily trades can be entered and exited, how stable prices are, and how much trading ultimately costs.
This matters because liquidity influences the overall market environment. High-liquidity conditions tend to create smoother price action, faster execution, and tighter spreads, while low-liquidity conditions can lead to erratic price movements, wider spreads, and execution uncertainty. As a result, the same trading strategy can perform very differently depending on liquidity.
Liquidity also affects trader behaviour. When liquidity is strong, traders are generally more willing to participate, which reinforces market depth and stability. When liquidity weakens, participation often declines, increasing risk and reducing market efficiency.
For this reason, understanding why liquidity matters is essential before exploring how it impacts specific areas such as trade execution, price stability, trading costs, and position risk, which are covered in the following sections.
Trade Execution
Liquidity has a direct impact on how quickly and accurately trades are executed in the forex market. In simple terms, higher liquidity means there are more orders available at nearby prices, making it easier for trades to be filled instantly.
When liquidity is high:
Orders are filled quickly
Slippage is minimal
Execution prices closely match expected prices
When liquidity is low:
Orders may be delayed or partially filled
Slippage becomes more likely
Execution prices can differ significantly from quoted prices
Here’s how it works: when a trade is placed, the market needs enough opposing orders to absorb it. If liquidity is thin, the price must move further to find those orders, increasing execution risk. As a result, liquidity plays a critical role at the exact moment a trade is entered or exited.
For this reason, traders often experience execution issues during low-liquidity periods, which is why understanding liquidity conditions is essential before placing trades, especially around volatile market events.
Read more:What is slippage and how to avoid it in trading
Price Stability
Liquidity has a strong influence on price stability in the forex market. In simple terms, liquidity determines how easily the market can absorb buying and selling pressure without causing sharp or erratic price movements.
When liquidity is high, price changes tend to be smoother and more orderly. Large trades can be executed with minimal impact, which helps prices respect technical levels such as support and resistance. This is why price action often looks cleaner during active trading sessions.
In low-liquidity conditions, even relatively small orders can push prices significantly. This can result in sudden spikes, false breakouts, and increased short-term volatility. As a result, price behaviour becomes less predictable and more difficult to trade consistently.
For this reason, traders often associate stable price action with high-liquidity environments and treat low-liquidity periods with greater caution.
Trading Costs
Liquidity plays a major role in determining how much it costs to trade forex. The key reason is that liquidity directly affects trading frictions, especially the costs traders face when entering and exiting positions.
In high-liquidity conditions, competition between buyers and sellers keeps costs low. Bid–ask spreads are typically tighter, execution is smoother, and price quotes are more consistent. This allows traders to enter and exit positions closer to their intended prices, reducing overall transaction costs.
When liquidity is low, trading costs tend to rise. Spreads widen, slippage becomes more common, and execution quality can deteriorate. Even if a trade idea is correct, higher costs can significantly reduce profitability or turn a marginal trade into a losing one.
This matters because the bid–ask spread is the most direct cost in forex trading, and it expands or contracts based on liquidity. For this reason, many traders closely monitor liquidity conditions to manage costs more effectively.
Read more:What Is the Spread in Forex? Learn to Calculate and Trade It
Position Risk
Liquidity also affects risk while a trade is being held, not just at the moment of entry or exit. In simple terms, liquidity influences how easily a position can be closed without unwanted price movement.
In high-liquidity environments, traders can usually exit positions quickly and close to the expected price. Price gaps are less common and stop-loss orders are more likely to be filled near their intended levels. This helps reduce uncertainty during the holding period.
In low-liquidity conditions, position risk increases. Prices can jump suddenly, stops may be filled at worse levels, and gaps can occur when market participation drops sharply. As a result, holding positions in thin markets or during quiet hours can expose traders to risks that are difficult to control.
For this reason, liquidity should always be considered as part of risk management, particularly when holding positions over session changes or major news events.
Market Environment
The market environment refers to the overall quality and behaviour of the forex market at a given time. In simple terms, it describes whether prices are forming in an orderly, efficient manner or in a more chaotic and unpredictable way.
Liquidity plays a key role in shaping this environment. When liquidity is high, pricing tends to be more transparent, spreads remain tight, and price movements reflect genuine supply and demand. This creates a healthier market where technical and fundamental analysis are more reliable.
When liquidity is low, overall market quality can deteriorate. Prices may react sharply to small orders, spreads widen, and sudden spikes or gaps become more common. As a result, the market environment feels less stable and more difficult to trade consistently.
For this reason, traders often assess liquidity first to understand whether current market conditions are favourable or whether caution is required.
How Liquidity Affects Forex Trading (Impact Summary Table)
Let’s make things easy; liquidity influences every practical aspect of trading, from execution quality to risk exposure. The table below summarises how high and low liquidity conditions affect key elements of the forex trading experience.
Aspect
High Liquidity
Low Liquidity
Trade Execution
Fast, reliable fills with minimal slippage
Slower fills, higher chance of slippage or partial execution
Price Stability
Smooth, orderly price movements
Sharp moves, spikes, and false breakouts
Trading Costs
Tight bid–ask spreads and lower total costs
Wider spreads and higher indirect costs
Position Risk
Easier exits, fewer gaps, more predictable stops
Increased gap risk and stop-loss slippage
Market Environment
Efficient, transparent, and trader-friendly
Unstable, unpredictable, and risk-prone
As a result, traders operating in high-liquidity conditions generally benefit from better execution, lower costs, and reduced risk, while low-liquidity environments demand greater caution and stricter risk management.
Factors Affecting Forex Liquidity
Liquidity in the forex market is not static. It changes constantly based on a range of underlying factors that influence how willing and able market participants are to trade. In simple terms, liquidity rises when participation increases and falls when traders step back.
This matters because shifts in liquidity can alter execution quality, spreads, and price behaviour, sometimes very quickly. By understanding what drives these changes, traders can better adapt their approach to different market conditions rather than being caught off guard.
The key factors that influence forex liquidity include market size, monetary policy, global news and events, trading hours, and overall market sentiment. Each of these can increase or reduce participation in different ways, which is why liquidity conditions are never the same for long.
For this reason, the following sections break down each factor individually to explain how and why liquidity levels rise or fall in the forex market.
Market Size
Market size plays a major role in determining liquidity in the forex market. In simple terms, larger markets with more participants tend to be more liquid because there is greater trading activity and stronger demand.
The core principle is volume. Currency pairs that attract a high number of buyers and sellers generate larger trading volumes, which improves market depth. This depth allows trades to be absorbed across multiple price levels without causing significant price changes.
In practice, this is why major currency pairs consistently offer better liquidity than minor or exotic pairs. Large global economies widely used currencies, and active institutional participation all contribute to deeper and more liquid forex markets.
As a result, traders often gravitate toward larger, more established currency pairs when they want stable conditions and efficient execution.
International Monetary Policies
Monetary policy has a significant influence on liquidity in the forex market because it shapes expectations about interest rates, capital flows, and economic stability. In simple terms, central bank decisions affect how confident market participants feel about trading a currency.
When monetary policy direction is clear and predictable, banks, institutions, and other participants are more willing to trade. This supports steady trading activity and helps maintain higher levels of liquidity. Markets tend to function more smoothly when participants broadly agree on policy expectations.
In contrast, when policy uncertainty increases, such as ahead of major interest rate decisions or during shifts in central bank guidance, some traders adopt a wait-and-see approach. Trading activity may temporarily decline, which can reduce liquidity and lead to wider spreads or more erratic price behaviour.
For this reason, liquidity conditions often change noticeably around central bank announcements, making monetary policy an important factor for traders to monitor.
Global News and Events
Global news and unexpected events can have an immediate impact on liquidity in the forex market. In simple terms, important information changes trader behaviour, which directly affects how active the market is.
Ahead of major economic data releases, geopolitical developments, or unexpected headlines, some market participants reduce exposure or step aside altogether. This temporary reduction in participation can cause liquidity to fall, even if volatility increases at the same time. As a result, spreads may widen and execution quality can deteriorate just before key events.
After the news is released and uncertainty begins to clear, trading activity often returns. Liquidity can recover as traders reassess the information and re-enter the market with greater confidence.
For this reason, liquidity conditions around major news events often shift rapidly, making it essential for traders to be aware of the broader news backdrop before placing trades.
Read more：FOREX NEWS
Market Trading Hours
Liquidity in the forex market varies throughout the day because different financial centres open and close at different times. In simple terms, liquidity increases when more markets are open and more participants are active simultaneously.
The key reason is participation. When major trading centres such as London and New York are open at the same time, the number of buyers and sellers rises sharply. Trading activity becomes more frequent, spreads tend to tighten, and execution quality improves. This period is widely regarded as the most liquid part of the trading day.
In contrast, during single-market sessions or off-hours, such as late New York or rollover, fewer participants are active. Liquidity tends to be lower, spreads can widen, and price action may become slower or more erratic.
As a result, many traders plan their activity around trading sessions, favouring high-liquidity periods to benefit from better execution and lower costs.
Read more：Best time to trade forex: When to enter the market during the day
Liquidity by Trading Session (Overview)
Rank
Trading Session
Time (UTC)
Liquidity Characteristics
NO.1
London–New York Overlap
~12:00–16:00
Highest liquidity, tight spreads, fast execution
NO.2
London Session
~07:00–16:00
Strong liquidity and steady volume
NO.3
New York Session
~12:00–21:00
Good liquidity, fading later in session
How Liquidity Changes Throughout the Day
Trading Session
Main Markets
Liquidity Level
Description
Asian Session
Tokyo, Sydney
Low–Moderate
Range-bound, slower price action
London Open
Europe
Rising
Liquidity increases rapidly
London Session
Europe
High
Deep market participation
London–New York Overlap
Europe & US
Very High
Peak liquidity and volatility
New York Session (Late)
US
Declining
Participation gradually falls
Off-hours / Roll-over
Global
Very Low
Wide spreads, thin liquidity
For this reason, understanding trading hours helps traders choose when to trade, when to reduce risk, and when to stay on the sidelines.
Market Sentiment
Market sentiment reflects the overall attitude of traders toward risk and opportunity in the forex market. In simple terms, it describes whether traders feel confident and willing to trade, or cautious and reluctant to participate.
When market sentiment is stable or risk appetite is high, traders are generally more willing to open and hold positions. Trading activity increases, order flow improves, and liquidity tends to remain strong. This creates a supportive environment with tighter spreads and smoother price action.
When uncertainty rises or sentiment turns risk-off, participation often declines. Some traders reduce position sizes or step aside entirely, which lowers trading volume and weakens liquidity. As a result, markets can become thinner and more sensitive to sudden price movements.
For this reason, shifts in market sentiment often coincide with noticeable changes in liquidity, making sentiment an important backdrop for assessing current market conditions.
Read more:What Is Market Sentiment? Definition, Indicators and Strategies
Market Sentiment and Liquidity Relationship
Market Sentiment
Trading Willingness
Liquidity Conditions
Description
Risk-on sentiment
High
Strong
Active participation and deep liquidity
Stable sentiment
Moderate
Balanced
Normal trading conditions
Rising uncertainty
Lower
Declining
Reduced activity and cautious trading
Risk-off sentiment
Low
Weak
Thin markets and elevated risk
In summary, liquidity tends to improve when traders feel confident and deteriorate when caution and uncertainty dominate.
What Causes Illiquidity?
Illiquidity refers to periods when it becomes difficult to buy or sell currency pairs without significantly affecting the price. In simple terms, illiquidity occurs when too few market participants are active, reducing the number of available orders.
This matters because illiquid conditions can lead to poor execution, wider spreads, and sudden price jumps. Even small trades may move the market more than expected, increasing risk for traders.
Illiquidity does not usually appear randomly. It is often the result of higher trading costs, increased uncertainty, or a lack of participation during specific market conditions. For this reason, understanding what causes illiquidity helps traders recognise when market conditions are deteriorating and adjust their approach accordingly.
The following sections explain the two main contributors to illiquidity: direct costs and indirect costs.
Direct Costs
Direct costs are the visible expenses traders face when placing trades, such as bid–ask spreads and transaction fees. In simple terms, when these costs increase, trading becomes less attractive for many market participants.
When direct costs rise, often during periods of low liquidity, some traders reduce their activity or step away from the market entirely. Fewer active buyers and sellers mean less competition, which can further widen spreads and deepen illiquidity. This creates a feedback loop where declining participation leads to even higher costs.
In practice, direct costs tend to increase during off-peak trading hours, around major news events, or in less actively traded currency pairs. As a result, market liquidity often deteriorates as trading becomes more expensive.
For this reason, monitoring direct trading costs provides valuable insight into current liquidity conditions and potential shifts in market participation.
Indirect Costs
Indirect costs are less visible but can be just as damaging as direct trading costs. In simple terms, these are the hidden risks that emerge when liquidity is low, even if spreads appear acceptable at first glance.
When market liquidity deteriorates, traders may experience execution uncertainty, increased slippage, or reduced execution quality. Orders may be filled at worse prices than expected or stops may trigger further away from intended levels. These outcomes effectively increase the real cost of trading.
As indirect costs rise, trading risk increases, and some market participants reduce activity or exit the market altogether. This further reduces participation and reinforces illiquidity.
For this reason, indirect costs often play a central role in creating prolonged periods of low liquidity and unstable market conditions.
How to Measure Liquidity in Forex
Understanding how to measure liquidity helps traders assess current market conditions and make more informed trading decisions. In simple terms, liquidity cannot be observed directly, but it can be evaluated using several practical indicators.
The key idea is to observe how actively the market is trading and how efficiently prices are formed. Factors such as volume, spreads, market depth, and price impact all provide valuable clues about liquidity conditions.
By combining these measures, traders can build a clearer picture of whether the market is deep and efficient or thin and potentially risky. For this reason, the following sections explain the most commonly used methods for measuring liquidity in the forex market.
Trading Volume
Trading volume reflects how much market activity is taking place over a given period. In simple terms, higher trading volume usually indicates that more buyers and sellers are active, which often corresponds to stronger liquidity.
Although the forex market does not have a centralised exchange, volume data provided by brokers or trading platforms can still serve as a useful reference. Rising volume typically signals increased participation, while falling volume suggests that fewer traders are involved.
For example, trading volume in major currency pairs such as EUR/USD often increases during the London - New York overlap. This increase in activity is usually accompanied by tighter spreads and smoother execution, reflecting improved liquidity.
As a result, monitoring volume trends can help traders identify periods of strong or weakening liquidity and adjust their trading approach accordingly.
Bid-Ask Spread
The bid–ask spread is one of the most direct and widely used indicators of liquidity in the forex market. In simple terms, the spread represents the difference between the price buyers are willing to pay (bid) and the price sellers are willing to accept (ask).
The key reason the spread reflects liquidity is competition. When many buyers and sellers are active, prices cluster closely together and spreads remain tight. When participation drops and liquidity weakens, spreads widen because fewer orders are available at nearby prices.
For example, EUR/USD typically trades with very narrow spreads during the London–New York overlap, when liquidity is at its highest. During off-hours or around major news events, those same spreads can widen noticeably as liquidity temporarily declines.
As a result, monitoring changes in the bid–ask spread provides traders with a quick and practical way to gauge current liquidity conditions before entering a trade.
Market Depth
Market depth describes the number and distribution of buy and sell orders at different price levels. In simple terms, it shows how much volume the market can absorb before prices need to move significantly.
When market depth is strong, there are sufficient orders on both sides of the market across multiple price levels. This allows trades, both small and large, to be executed without causing sharp price changes, which is a clear sign of healthy liquidity.
In contrast, shallow market depth means fewer orders are available. Even modest trades can push price quickly from one level to another, increasing volatility and execution risk. As a result, weak market depth is often associated with low-liquidity conditions.
This is why market depth is particularly useful for understanding how resilient the market is to order flow, not just how active it appears on the surface.
Price Impact
Price impact refers to how much the market price moves as a result of a trade or series of trades. In simple terms, it measures how sensitive price is to buying or selling pressure.
In high-liquidity markets, price impact is usually low. There are enough buyers and sellers, and orders are spread across multiple price levels, so trades can be absorbed without causing large price changes. This allows prices to move gradually and reflect genuine supply and demand.
In low-liquidity conditions, price impact increases. Fewer available orders mean that even relatively small trades can push prices sharply higher or lower. As a result, markets can become jumpy and less predictable.
For this reason, observing how much prices move in response to trading activity provides another practical way to assess liquidity in the forex market.
Liquidity Measurement Summary Table
To put it simply, different liquidity indicators behave very differently depending on how active the market is. The table below summarises how the most common liquidity measures typically appear under high and low liquidity conditions.
Liquidity Indicator
High Liquidity Conditions
Low Liquidity Conditions
Trading Volume
High and consistent activity
Low or sporadic activity
Bid–Ask Spread
Narrow and stable
Wide and unstable
Market Depth
Deep order book across price levels
Thin order book with gaps
Price Impact
Minimal price movement per trade
Large price movement per trade
As a result, traders often assess several of these indicators together rather than relying on a single measure when evaluating liquidity.
Tools to Assess Liquidity
Traders don’t need to guess liquidity conditions. In simple terms, several practical tools can help assess how active and efficient the forex market is at any given time.
Common tools used to assess liquidity include:
Volume indicators – Show changes in trading activity and participation. Rising volume often signals improving liquidity, while falling volume suggests it may be drying up.
Economic calendars – Highlight upcoming data releases or events that may temporarily reduce or disrupt liquidity before and after announcements.
Trading platforms – Real-time spreads, execution speed, and (where available) depth-of-market information offer direct insight into current liquidity conditions.
By combining these tools, traders can better anticipate changes in spreads, execution quality, and risk. For this reason, liquidity assessment is most effective when multiple signals are considered together rather than in isolation.
How to Use Liquidity in Forex Trading
Understanding what liquidity is in the forex market allows traders to apply this knowledge more effectively in real trading situations. In simple terms, liquidity helps traders decide what to trade, when to trade, and how much risk to take.
Liquidity is not about predicting price direction. Instead, it helps traders assess the quality of the trading environment. High-liquidity conditions generally support smoother execution and lower costs, while low-liquidity conditions require more caution and adjustment.
By recognising changes in liquidity, traders can adapt their strategies rather than forcing trades in unfavourable conditions. For this reason, liquidity awareness is a practical skill that improves consistency over time.
Identifying Liquid Markets
Markets with high liquidity typically have a large number of participants and steady trading activity. In simple terms, liquid markets are easier to trade because prices form efficiently and orders are filled reliably.
Traders can identify liquid markets by observing:
Consistently tight bid–ask spreads
Strong and stable trading volume
Smooth price movement with fewer gaps
Major currency pairs traded during active sessions usually meet these criteria. As a result, identifying liquidity helps traders understand execution conditions before placing trades rather than discovering problems after entering a position.
Timing Trades
Liquidity varies throughout the trading day, and timing trades around liquidity conditions can significantly improve execution quality. In simple terms, trading when liquidity is high reduces friction and uncertainty.
Many traders focus on:
Session opens
Major session overlaps
Periods of increased institutional participation
By aligning trades with high-liquidity periods, traders often benefit from tighter spreads, faster execution, and more reliable price action. For this reason, timing is not just about volatility, but also about liquidity.
Read more：Best time to trade forex: When to enter the market during the day
Risk Management and Liquidity
Changes in liquidity can directly affect volatility, execution quality, and overall risk. In simple terms, lower liquidity increases uncertainty, while higher liquidity helps contain risk.
The table below outlines common risks associated with different liquidity conditions and how traders typically manage them.
Read more:Forex risk management: 10 tips to manage 6 key risk types in trading
Liquidity Condition
Potential Risks
How to Manage
High Liquidity
Overconfidence, overtrading
Maintain discipline and position sizing
Decreasing Liquidity
Rising spreads, slippage
Reduce trade size, tighten exposure
Low Liquidity
Poor execution, price gaps
Avoid trading or trade selectively
Sudden Liquidity Changes
Sharp moves, stop slippage
Use conservative stops and reduced leverage
As a result, effective risk management always considers current and expected liquidity conditions.
Managing Trading Costs
Liquidity has a direct influence on overall trading costs. In simple terms, the less liquid the market, the more expensive it becomes to trade, both visibly and invisibly.
Direct costs include bid–ask spreads and transaction fees, which are usually easy to observe before entering a trade. These costs typically rise as liquidity falls.
Indirect costs emerge during execution and trade management. Slippage, delayed fills, and reduced execution quality are more common in low-liquidity environments. As a result, the final execution price may differ from what was initially expected.
Cost Type
Source
Relation to Liquidity
Direct Costs
Spreads, commissions
Increase as liquidity weakens
Indirect Costs
Slippage, execution risk
Rise sharply in thin markets
Total Trading Costs
Combined impact
Highest in low liquidity
For this reason, traders who understand liquidity are better equipped to evaluate the true cost of trading rather than focusing solely on spreads.
Read more:What Is the Spread in Forex? Learn to Calculate and Trade It
FAQ
Which forex trading pair has the most liquidity?
EUR/USD is the most liquid forex pair due to its high daily trading volume and broad participation from banks, institutions, and retail traders worldwide.
Can AI predict liquidity changes?
AI can analyse historical data, volume patterns, and market conditions to identify potential liquidity shifts, but unexpected news and events can still cause sudden changes that are difficult to predict and even AI struggles with this.
What is liquidity in simple terms?
Liquidity is how easily you can buy or sell an asset without affecting its price. High liquidity means trades are quick and efficient, while low liquidity means trading is slower and more costly.
Is high or low liquidity better?
High liquidity is generally better for most traders because it offers tighter spreads, smoother execution, and lower overall risk.
What happens when liquidity is high?
When liquidity is high, spreads tend to be tight, execution is faster, and price movements are more stable and predictable.
What is the difference between liquidity and volatility?
Liquidity refers to how easily trades can be executed, while volatility measures how much prices move. A market can be liquid but volatile, or illiquid and quiet.
Does liquidity change throughout the trading day?
Yes, liquidity changes as global trading sessions open and close, with the highest liquidity usually occurring during major session overlaps.
Does news impact liquidity in the forex market?
Yes, liquidity often decreases before major news releases as traders step aside, then increases again once uncertainty clears.
Conclusion
Liquidity is one of the most important yet often overlooked forces in the forex market. It influences execution speed, trading costs, price stability, and risk exposure, often determining whether a trade feels smooth or frustrating.
By understanding how liquidity works, how it changes, and how it can be measured, traders gain a clearer picture of market conditions. Adjusting strategies to match liquidity, rather than fighting it, can lead to better execution, lower costs, and a more consistent trading experience over time.
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I’m often slightly baffled when writing educational forex articles as to why so many traders struggle to make consistent money in the forex markets. The irony is that most of them actually know quite a lot. The problem isn’t what they know, it’s what they don’t know that really matters.
After spending 14 years working in trading, extracting money from the markets has become second nature for me. Not because of some magical indicator or secret strategy I possess, but because I understood how the real money actually trades.
And that’s where most retail traders go wrong especially the newbies when they first try their hand at trading.
Why Most Forex Traders Are Guessing
Here’s a statistic that should make you sit up and listen:
● Bank traders account for roughly 5% of all forex traders
● Speculators make up the other 95%
● That 5% of bank traders controls around 92% of total FX volume
Let that sink in.
If you don’t understand how that 5% trades, then you’re not really trading, you’re guessing. Educated guessing, perhaps, but guessing all the same.
Now, let me clear up one of the biggest myths about institutional traders.
They do not sit there all day hammering the buy and sell buttons, scalping ten pips at a time to hit their daily targets. In reality, most of their activity is simply executing orders for clients, something commonly referred to as clearing the flow. They may process thousands of trades a day, but almost none of those are for their own book.
How Bank Traders Actually Trade Forex
When it comes to proprietary trading, the trades that actually matter, bank traders typically place two or three trades a week. That’s it.
These are the trades they’re judged on at year-end. These are the trades that determine bonuses. And as you can imagine, they’re not taken lightly. Bankers like to brag about their bonuses, size does matter!
So no, bank traders are not glued to five-minute charts, desperately scalping to “make their number.” They are methodical, patient, and highly selective. Trades are only placed when technical and fundamental conditions line up.
That’s the part retail traders need to understand.
Why Your Charts Are Probably Working Against You
I’m often genuinely dumbfounded when new clients show me their charts. They’re usually littered with indicators, oscillators on top of oscillators, many of which lag price by three or four hours and frequently contradict each other.
Trading like this is one of the fastest ways I know to demolish a trading account.
Bank traders’ charts look nothing like this. In fact, they’re almost boring by comparison.
All they want to know is:
● Where are the key levels?
● Where is price likely to react?
That’s it.
Indicators were designed to try and predict the market. Bank traders don’t need to predict it, they are the market. If you understand how they operate, indicators become largely redundant.
Their technical analysis boils down to one thing: support and resistance.
Clean charts. No clutter. No distractions. Just the levels that actually matter.
Now, before anyone gets excited, I’m not going to go into precise entry techniques here, because they’re almost never where people think they are. Trendlines are simply reference points. Execution is a completely different conversation.
The Real Driver: Fundamentals
Where bank traders really earn the bulk of their money is through fundamentals.
The fundamental backdrop of any currency is shaped by three major forces:
1. Economic data
2. Central bank policy
3. Political influence
And this is why currency direction can sometimes look messy.
When political noise contradicts central bank messaging, markets become choppy and directionless. But when political conditions are stable, central bank policy is clear, and economic data supports that policy, that’s when big, clean trends emerge.
That’s what bank traders wait for.
Mastering fundamentals is not easy. It’s complex, nuanced, and takes years to truly understand. But if you do understand it, you’re positioning yourself on the right side of long-term currency direction, which is where real money is made.
Trading Economic Data (The Right Way)
There is a huge amount of money to be made trading economic releases, but only if you do it properly.
Two things are essential:
1. A deep understanding of how different data points affect currencies
2. The ability to execute trades decisively, without hesitation
If you hesitate, the opportunity is gone.
These are the same economic releases that central banks base policy decisions on. By following and trading them correctly, you’re not only staying aligned with monetary policy, but you’re also growing your capital at the same time.
This is professional trading. Not gambling.
Capital Management: The Part Everyone Ignores
To trade successfully over the long term, you need a comprehensive capital management system. This isn’t optional, it’s your entire business plan.
A proper system should:
● Protect capital during uncertain periods
● Allow for capital expansion when conditions are right
● Define risk-to-reward, position sizing, and exits in advance
When this is in place, your only job while trading is identifying high-quality opportunities. The stress disappears. You’re no longer glued to screens, panicking over every tick.
And here’s a reality check: most bank traders spend large parts of the day chatting on the desk, speaking with other traders, or heading out to lunch with brokers. They are not staring at charts all day.
Neither should you be if you are trading smarter.
Trading With the Market, Not Against It
From there, it’s simply about understanding which strategies to apply, and when to apply them.
Plenty of traders talk about “beating the bankers.” I’ve even seen entire books written on it. But that misses the point entirely.
You don’t want to beat them. You want to join them.
Trade with the market, not against it.
Final Thoughts
There are no miracle secrets in forex trading. No magic indicators. No robots that can truly adapt to a dynamic, global market. The future maybe going that way, but we are not there yet.
Success comes from understanding how the major players analyse, trade, and manage risk. Get those foundations right, and you’re already miles ahead of most retail traders.
At its core, making money in the markets is no different from any other business. Walmart and JP Morgan operate on the same principle; they just sell different products.
Buy at wholesale prices. Sell at retail prices.
Forex is not so different.
