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Market liquidity

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The highest degree of liquidity, of course, is possessed by monetary resources, and the Forex market is the most liquid trading platform in the world. Its volumes include the summing up indicators of various markets. Every day, the volume of trading in the Forex market is measured in trillions of US dollars, so it has the highest liquidity.

Forex market liquidity has several different parameters:

  1. spread is the difference between ASK and BID prices (supply and demand),
  2. trading turnover,
  3. the physical volume of transactions,
  4. the number of transactions,
  5. the number of market participants,
  6. heterogeneity of participants,
  7. price volatility,

and so on.

Each instrument on the market has its own characteristics.

For example: the liquidity of different markets with the same liquidity indicators can vary greatly. When analyzing the liquidity of the forex market, you need to pay attention to such criteria as:

1) Viscosity.

Market viscosity indicates how much the actual trade price deviates from the average market price. The measuring instrument is the value between ACK and BID (spread), the difference between the bid (buy) and demand (sell) quotes. The spread reflects the minimum cost of concluding (transaction) a deal. The most accurate viscosity indicator on the market is the so-called "effective" spread, i.e. the difference between the real and the average transaction price at the time of the transaction in the market.

2) Market depth.

The depth of the market is the activity of all its participants, which includes the volume and turnover of trade. Its essence is to assess the real volume of the market (supply, demand). The depth of the market is measured using indicators such as the maximum trade volume that cannot affect the change in the quotes themselves, or the number of all orders for (buy, sell) / the volume of registered orders on the trading floor at the moment. The more liquidity in the market, the deeper its depth.

3) Ability to recover.

The ability to recover is the time during which the price fluctuations stop, which are caused by the execution of a transaction, i.e. the imbalance between demand and supply prices disappears.

The main disadvantage in measuring liquidity using the above indicators is the complexity of data collection and the lack of statistics.

The second disadvantage is the very static nature of the above criteria. These liquidity indicators can be calculated only at a given time and the present value of quotes. Because they change greatly when the situation and time in the forex market change. Despite the difficulty of obtaining high-quality liquidity estimates, the benefits from them when choosing a trading platform are very significant.


Johannes Röll
Johannes Röll

Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer

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