It is evidential that liquidity has been an important economic factor long time ago, and continues to be today. In a matter of fact, any individual or nation can grow wealth, however; with low liquidity in the market there are high possibilities of facing bankruptcy. For those who might not be fully aware; liquidity basically means the existing demand for a product or a service.
Throughout the article we will explain why liquidity is important
Ø Get a Good insight s of crowds’ behavior
In most cases, liquid markets follow the crowd’s behavior, as it’s easier to read and analyze, compared to; investors’ behavior. are always going to follow the behavior of a crowd, as it is easier to read when compared to the investor’s behavior. Individuals having a clear understanding of the forex market will bear witness to the fact that this is a common characteristic of the less liquid markets.
Therefore, you can get a good sense of how the majority are behaving and interacting within the market. It might be difficult to obtain full insight of the decisions made by some small group of people, however; such information are completely unrelated when making trading decisions. No wonder it is very easy for most traders to predict the price action and direction in liquid markets.
Ø Easy to be managed by Mechanical Trading Systems
Since liquid markets are prone to logical analysis, they tend to follow price patterns such as support levels, resistance levels and trends. The process is managed more strictly as opposed to the case of low liquidity markets. Consequently, this means that liquid markets can be effectively managed by mechanical trading systems. This explains why trading algorithms continues enjoy favorable reputation around the world. Actually, you can make use of automated trading system software in thin markets as well even though you are going to encounter many whipsaws.
Ø Price Fluctuations are Lower
Finally yet most importantly is the fact that price fluctuations in liquid markets are less frequent than those in low liquidity markets. This means the spreads are way smaller, thus; making it beneficial to a retail provider. It is not surprising to come across some brokers who are offering spreads as low as 0.2-0.3 pips in most liquid pairs. On the other hand, big companies shares are traded in the stock exchange are normally 20-30 pips average spread. It is for this reason that the trading volume in the forex market can surpass $5 trillion a day.
The Bottom Line
Liquidity role in the forex market cannot be ignored when profitable deals are meant to be made. However, you need to make sure you are relying on the best Forex trading strategy if you are to avoid losses. The good news are, that there are a number of online platforms offering support and assistance to decide on the best strategy. Alternatively, you seek help from your colleagues who have a clear understanding of the Forex Market.