Tag: Liquidity

Categories
Forex Course

166. Introduction To Obscure Currency Crosses & Why It Is Very Risky To Trade Them?

Introduction

Introduction

Introduction

Trading currency crosses an excellent way to make money from forex trading when major currency pairs do not make a good move due to the US economy’s corrective momentum. However, the US dollar is a global reserve currency of every country. Therefore, it can provide enough liquidity to make money where the obscure currency crosses have some risks due to insufficient liquidity.

What is Obscure Currency Cross?

We can find currency crosses when we eliminate the US dollar from major and commodity currencies. However, among the cross currencies, the Euro and the Japanese Yen are mostly traded. Therefore, if you trade any Euro and Yen related cross pair, you might see the price to have adequate liquidity. But, what happens if the currency cross does not have Yen or Euro?

Any cross currency pairs that do not have Japanese Yen or Euro as a first or second currency is called an Obscure currency cross. Examples of obscure currency crosses are GBPCHF, NZDCAD, AUDCHF, CADCHF, NZDCHF, NZDCAD, etc.

Why are Trading Obscure Currency Crosses Risky?

The forex market is run through a decentralized network where no one can dominate any market. Therefore, the movement of a currency pair depends on the supply and demand of that currency pair. When the supply or demand increases, the currency pair starts to move. On the other hand, when there is less volume, the currency pair may move within a correction.

The liquidity remains lower in the obscure currency pair than major, commodity, and EUR/YEN related currency pairs. Therefore, there is a risk of market volatility and correction. In some cases, obscure currency pairs consolidate for a long time, and if we take any trade on that pair, we might have to hold the trade for a considerable time.

Conclusion

In conclusion, we can say that trading obscure currency pairs have some reason to worry due to not having enough liquidity to provide a decent movement. However, it is a great way to make money from obscure currency pairs if we can read the price action well and identify the price is moving within a trend. Overall, maintaining a profitable and robust trading strategy is the key to make a consistent profit from the forex market.

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Categories
Forex Basic Strategies

Filtering The Most Profitable Trading Signals Using The ‘Zig-Zag’ Forex Trading Strategy

Introduction

Introduction

Introduction

In today’s article, we discuss a strategy that is based on the unfamous zig-zag indicator. The zig-zag indicator serves to shows changes and continuation in trends that occur in price movements. Usually, this indicator is used by traders to look for reversal points in the market. But in today’s strategy, we will use the zig-zag indicator to trade the continuation of a trend. However, if we think a little deep, this type of trading is also a form of ‘reversal trading’ where we will be finding the reversal points in a smaller trend within the larger trend.

At first glance, the indicator appears very simple but is not easy to understand by novice traders. The trading strategy that uses this indicator is not special because it uses this indicator, but since we are imparting various other concepts of technical analysis such as chart patterns, trend lines, and price action. But using this indicator alone too can generate good trading signals provided the trader is having good skill of this indicator properly.

Time Frame

The ‘zig-zag’ strategy can only be applied to the ‘Daily’ time frame. Hence, this strategy is not for intraday and short-term traders. We need to have a longer time horizon to trade using this strategy.

Indicators

We use two technical indicators in this strategy

  • Simple Moving Average (20-period)
  • Zig-Zag (default setting)

Currency Pairs

We can apply the following strategy on both minor and major currency pairs. Liquidity and volatility will not be a major issue here as we are trading on higher time frames.

Strategy Concept

We are basically using the zig-zag indicator to identify classic chart patterns of technical analysis and trade them. The indicator is very effective in reducing the noise by helping the technical trader in viewing the larger picture and general market direction. Here, we look for appropriate chart patterns and associated price action indications within the context of a trend.

When these patterns are formed just anywhere on the chart, they do not hold much value as there is no logic to that. Once we identify a trend using the simple moving average (SMA), we wait for trend continuation signs provided to us by the zig-zag indicator and the chart pattern. The formation of the chart pattern is the first sign of trend continuation. Once price action develops and the market moves in the direction of the major trend, we look for ‘entry’ signals and then only enter into a trade.

One of the astounding features of this strategy is it’s risk-to-reward (RR) ratio. Trades executed this strategy have high risk-to-reward (RR) because we are trading with the major trend and the need for a smaller stop-loss. Not only is ‘RR’ of trades high, but also the probability of winning is much higher in this strategy due to stricter rules and time given for a trade setup to be formed. Now that we got a gist of the strategy, let us find out the actions required to execute the strategy.

Trade Setup

In order to execute the strategy, we have considered the ‘Daily’ chart of the USD/JPY currency pair, where we will be illustrating a ‘short’ trade. Here are the steps to execute the strategy.

Step 1: Firstly, we have to identify the trend of the market on the ‘Daily’ chart. This can easily be done with the help of the simple moving average (SMA) indicator. If the price stays below the SMA for a long period of time, we say that the market is in a downtrend. And if it remains above the SMA for a sufficient period of time, we say that the market is in an uptrend. It is worthwhile to note that zig-zag is not being used for establishing the trend.

The below image shows that the market is in a strong downtrend in the case of USD/JPY.

Step 2: After identifying the trend of the market, we wait for the market to form a ‘head and shoulders’ pattern in a down-trending market and an ‘inverse head and shoulders’ pattern in an up-trending market. Here’s where the application of the zig-zag indicator comes into the picture. The chart pattern should essentially be indicated by the zig-zag pattern—the lines of indicator show the ‘real’ formation of the pattern in the market. In addition to this, we plot a trendline that connects the ‘lows’ (head and shoulders) or ‘highs’ (inverse head and shoulders) of the pattern as indicated by the indicator. This completes the execution of 80% of the strategy’s rules.

Step 3: We enter the market for a ‘buy’ or ‘sell’ after the price breaks the trendline and ‘tests’ it on the other side. In simple words, in a ‘head and shoulders’ pattern, we enter for a ‘sell’ when price breaks the ‘support’ trendline and re-tests after making a ‘lower low.’ While in an ‘inverse head and shoulders pattern,’ we enter for a ‘buy’ when price breaks the ‘resistance’ trendline and re-tests after making a ‘higher high.’

The below image shows how a ‘short’ entry is taken.

Step 4: Now, let us determine the stop-loss and take-profit levels for the strategy. When ‘short,’ we place a stop-loss above the right shoulder of the ‘head-and-shoulder’ pattern. Similarly, when ‘long, stop-loss is placed below the right shoulder of the ‘inverse head-and-shoulder’ pattern. Take-profit will be set at the ‘lower low ‘of the major downtrend and at the ‘higher high’ of the major uptrend. The risk-to-reward (RR) of trades executed using this strategy will be at least 1:1.5.

The below image shows the result of sample trade executed using the zig-zag strategy.

Strategy Roundup

Even though the above strategy takes a lot of time to present a potential trade, the risk-to-reward and probability of winning of these trades are worth waiting for. There are many applications of the zig-zag indicators. Traders make use of other technical indicators like the Stochastic Oscillator and Relative Strength Index (RSI) together with the zig-zag indicator to locate the overbought and oversold conditions of the market.

Categories
Crypto Guides

What Should You Know About ‘Automated DeFi-Styled Market Pool’ Launched By Binance

Introduction

Introduction

Introduction

The leading global cryptocurrency exchange “Binance” launched an automated DeFi-styled market pool for cryptocurrency investors to offer them with instant token swapping functionality. Binance officially brought this new trading platform from the decentralized finance (DeFi).

The platform will allow the money maker to deal with smart contracts. The cryptocurrency exchange system announced that it is an automated market maker (AMM) pool. The users are not only allowed to trade with funds but can also host liquidity pools. For the first time, an AMM pool is attached to the centralized trading exchange system. 

Binance Liquid Swap Product

The AMM pool product called “Binance Liquid Swap” will allow the users to keep their crypto funds in the pools for providing liquidity to the market. In return, they will earn the interest and share from the pool trading commission. They implemented an AMM model for pricing to provide users with stable pricing and low fees.

The AMM exchange model uses a predefined algorithm for pool liquidity to make markets. The exchanges provide liquidity to the pools regardless of the user’s token prior order size. The reward system and trading fee are yet to be disclosed. 

To start, the AMM pool provides the following trading pairs :

  • USDT/BUSD
  • USDT/DAI
  • BUSD/DAI

The security of the product is strengthened due to the Binance platform and also because of its move into the DeFi space with the launch of Binance Smart Chain. The smart chain is a highly performing Ethereum virtual machine. It is compatible with blockchain and works in parallel with the Binance chain. It offers users with smart contracts and allows them to stake a Binance coin. 

Binance Jump in DeFi 

In Binance, the liquid swap transaction fees and prices on AMM depend upon the asset number in each liquidity pool. The prices vary when currencies are added, removed, or swapped in the pool. The trader’s share in the pool will be collected every 7-day as an annual percentage yield (APY). The profit generated will be turned into assets for the respective pools. Binance introduced AMM pools to centralized exchange systems for more safety, security, and credibility.

As the decentralized Ethereum pool is highly risky due to huge market price fluctuations; hence, Binance went for the centralized approach, which would most probably minimize the big margin loss. The Binance is working to deliver instant swap liquidity in order to attract more participants and to incentivize the pool contributors for the community benefit. 

Conclusion

Binance designed this new DeFi “Binance Liquid Swap” having different liquidity pools so that users can earn income instantly and easily without much effort. The centralized AMM pool offers users to buy, stake, and trade their crypto assets. The instant swapping functionality will be executed via a centralized platform.

The users will be able to earn through interest and trading commission from the shares. This centralized platform is able to provide stable transaction prices and lower fees. The DeFi products perform better in the market if more investors are involved in providing liquidity to trade. Hence, to attract more liquidity providers, Binance is providing rewards in return. 

Categories
Forex Course

22. Perks Of Trading The Forex Market

Introduction
The foreign exchange market is, no doubt, the most popular market in the world. Though it is considered to be a very risky business, it can prove to be

Introduction
The foreign exchange market is, no doubt, the most popular market in the world. Though it is considered to be a very risky business, it can prove to be

Introduction

The foreign exchange market is, no doubt, the most popular market in the world. Though it is considered to be a very risky business, it can prove to be the best platform for trading and investing if things are done wisely. People often are in a dilemma to choose between the stock market, commodity market, and the forex market. Hence, it is important to know the benefits each market has to offer. So, in this lesson, we shall discuss some significant benefits the forex market has to offer.

Advantages of Trading Forex

Open 24/5

The forex market is traded throughout the day from Monday to Friday. And this got to be the biggest advantage for the part-time traders. Since there are quite a large number of people who are into 9-5 jobs, the forex market is an excellent option as one can trade anytime during the day. Hence, the forex market is the most flexible market when it comes to timings.

Great Liquidity

The forex market is the largest market in the world. It has a huge volume of orders coming in every single second. With high liquidity, trades are executed as soon as the order is placed. In fact, the forex market has the highest liquidity compared to any other market.

Margin Trading

In forex, the retail traders get the facility to trade with leverage. That is, with leverage trading, a trader can trade with quantities even if they do not possess the required amount. This is a great advantage as it paves the way for the small traders who are willing to participate in the market.

Nominal Commission and Transaction Costs

Another significant benefit to consider about the forex market is that the forex brokers don’t really charge any high fee, such as brokerage fees, exchange fees, or clearing fees. Having said that, they do charge commission, which is in the form of spreads. The bid/ask price, which is often referred to as the transaction cost, is typically around 1% when the market conditions are normal.

The Freedom on Lot Sizes

In forex, the brokers allow trading with as low as 0.001 lots. And traders can choose from 0.01 lots, 0.1 lots and 1 lot. Hence, there are variable lot sizes in this market. But, if you were to consider the futures market, the lot sizes are of one type and are determined by the exchanges.

Free Demo Trading

Demo trading is one of the best features the forex brokers have to offer. And the cherry to the cake is that demo trading accounts are free of cost. Demo trading can be very helpful to both novice and professional traders. Novice traders can use it to get the hang of placing orders and other features in the platform, while professional traders can use them to test the consistency of their strategies. Hence, we can consider demo trading to be a powerful risk-reducing tool.

Facility to Go long and Go Short

In the forex market, there is no directional bias. This is because currencies are traded in pairs. If a trader thinks the base currency would rise in value, they can go long, and if they think it will depreciate in value, they can go short. So, unlike the stock market, a trader need not borrow shares to sell short an instrument. Hence, traders can profit from both rising markets as well as falling markets without any complications.

Hence, these were some of the most significant features and advantages of the forex market. In the coming lesson, let us put up a comparison between different markets and see which market proves to be the best; for now, take the below quiz and see if you have understood this lesson correctly.

[wp_quiz id=”48839″]
Categories
Forex Market

Dealing With Liquidity & Volatility In The Forex Market

What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest

What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest

What is liquidity?

When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest figures suggest that the daily trading volume of forex is close to $5.1 trillion.

Liquidity is the ability to trade a currency pair on demand. In simple terms, it is the measure of how easily a currency can be exchanged. When you are trading major currency pairs, you have an exceedingly high amount of liquidity. This liquidity is provided by financial institutions, big businesses, and retail traders as well. However, not all the currency pairs are liquid; liquidity depends on whether a currency pair is major, minor, or exotic. Major pairs typically have high liquidity compared to the other currency pairs. In the next section, we will look at some of the money management principles in trading with respect to liquidity.

Liquidity and Risk

A market with low liquidity has chaotic moves and gaps because of the absence of buyers and sellers at any given point of time. These gaps occur when news announcements are made over the weekend or if an event happens at the same time. The chart below depicts such a gap after a news release.

According to money management principles, when you know that there will be a change in liquidity levels between Friday to Monday, it is not advised to carry huge positions on Friday. The risk drastically increases, if the price opens above your stop loss on Monday, it will become a market order, and this loss will be much higher than the predefined loss (determined using stop-loss). A conservative trader especially should not take any positions during times of news releases.

Retail forex traders need to manage liquidity risk by lowering their leverage and putting stop losses based on higher time frames. In this way, you would be safe from any kind of gaps that happen at the beginning of the week.

Volatility

Volatility refers to the currency fluctuations in the global exchange market. Price movements can vary from hour to hour, minute to minute, and second to second, depending on many factors. A lot of forex traders enjoy volatility, but it comes with a risk. Therefore it is important to manage volatility and do plenty of research before placing a trade.

Eliminating the risk of volatility

In order to make the most out of volatility, follow the below-mentioned techniques:

Volatility strategies

Money management, in relation to volatility, essentially suggests traders invest in strategies that can perform in different market conditions. Some of the strategies that can be used to turn the volatility in your favor include widening your targets, placing tight stop-losses, and analyzing the higher timeframes.

Stay diversified

Don’t rely too much on any asset class or forex pair. If one investment performs poorly, other investments may perform better over that same period and thereby reducing your overall losses. This happens due to the difference in volatility across various asset classes. A balanced portfolio protects from losses and provides a high return on investment.

Money management should always be a top priority for every trader, as these principles guide us while taking trading decisions. A lot more concepts related to money management will be discussed in the upcoming articles.

Categories
Forex Market

Everything You Need To Know About The Forex Currency Pairs

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex is fundamentally about.

How does it work? 

A currency pair is a code representing the interaction of two different currencies. In that pair, the first currency is known as the Base currency, and the second one is called the Quote currency. When you are buying a currency pair, you are essentially buying the base currency and selling the quote currency. It is vice-versa for selling.

When you see a currency quoted as 1.32., it means you can exchange 1 unit of base currency for 1.32 units of the quote/counter currency. When the value of currency changes, it is always relative to another currency. If the value of GBP/USD changes from 1.26345 to 1.26460 the next day, it means that the Pound has appreciated relative to U.S. dollar or U.S. dollar has depreciated relative to Pound as it will cost more USD to purchase 1 Pound.

What are the major currency pairs?

The most liquid currency pairs are known as major currency pairs. These are the pairs where USD is involved either as a quote currency or base currency. Some of the most popular currency pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF, and USD/CAD. They represent some of the largest economies of the world and are traded in high volumes. These currencies also have low spreads, which is good for traders.

Minor or cross-currency pairs

Cross-currency pairs are nothing but the crosses of major currencies. They do not include the USD in them. Some of the popular cross-currency pairs include EUR/GBP, EUR/JPY, and EUR/CHF. Even though the trading volume of these pairs is significantly low compared to the major currency pairs, they do contribute with a large amount of volume to the Forex market. Let’s understand more about the volatilities and preferences of these minor currencies.

  • Predicting the EUR/GBP currency pair is most difficult compared to other currencies.
  • Traders prefer trading EUR/JPY as they believe it is easier to forecast, thus making it a popular cross-currency pair.
  • EUR/CHF is also popular because of the fact that the Franc is a safe-haven currency. It is traded during times of high volatility.

Here we have only discussed the EUR crosses. We recommend you to explore more cross-currency pairs and understand each of their volatilities. There is another type of currency pair known as Exotics. In this type of currency pairs, one currency is Major while the other an upcoming currency. Examples – USD/TRY & USD/MXN.

Commodity currencies

Australian dollar and New Zealand dollar are the currencies that are greatly influenced by commodity prices. The Australian dollar is greatly affected by mining commodities, beef, wool, and wheat. Aussie (AUD) is strongly influenced by China as these two countries are huge trading partners. USD/CAD is also one currency that is affected by commodities like oil, timber, and natural gas. The Canadian dollar price movement is strongly related to the U.S. economy. New Zealand, however, is heavily influenced by news release of agriculture and tourism. Along with commodities, the effect of central banks and reserve banks shouldn’t be underestimated. Changes in monetary policy from either of the country’s banks will lead to huge volatility.

The point we are trying to make here is that each of the currency pair’s price movements is influenced by some of the other external factors. As you start your journey in trading Forex markets, you will understand these influencing factors in detail.

What moves these currency pairs?

As discussed above, there a lot of independent factors that move the price of these currencies. But the fundamental factors are interest rates, economic data, and politics. Let’s understand these in detail.

Interest rates – Central banks raise or reduce interest rates to maintain financial stability. This increases demand for currencies whose interest rates are high, as investors get a higher yield on their investments.

Economic data – Economic releases are reports that give a glimpse of the nation’s economy. Relevant economic data include CPI, Non-farm payroll, GDP, Retail sales, and PMI. This data will have a positive or negative effect on that country’s currency.

Politics – Trade wars, elections, and changes in the ruling government introduce instability, which reflects in the Forex market. The decision the government’s take can boost or depreciate the economy.

Which currency pair should you trade? 

If you are new to forex, choose the currency pair which has the most liquidity. Always start with Major pairs before exploring the others. Analyze the fundamentals of a currency. If you know technical analysis, you can combine it with technical indicators to know and understand when to trade. Do not use leverage; even if you do, use appropriately so that you don’t wipe out your account. To learn more about Forex trading from the very basics, you can sign-up for our free Forex course here. Cheers!

Categories
Forex Course

5. How Large & Liquid Is The Forex Market?

When compared to other markets like the stock and commodity market, the foreign exchange market is the largest in the world in terms of size and liquidity. In this lesson

When compared to other markets like the stock and commodity market, the foreign exchange market is the largest in the world in terms of size and liquidity. In this lesson

When compared to other markets like the stock and commodity market, the foreign exchange market is the largest in the world in terms of size and liquidity. In this lesson, we shall go over some insights on the size and liquidity of the forex market.

Where is the Forex market headquartered?

The stock markets across the world have different central exchanges where all the transactions are processed. But, in the case of the forex market, there is no central exchange (physical counter) where the transactions can be processed. In fact, this market runs electronically, connected by a network of banks. This, in short, is called an interbank market or an over-the-counter (OTC) market. Hence, this enables traders to trade in the forex market from anywhere in the world. Also, this is one of the reasons for its high volume of trading.

Forex market’s volume

The amount of money traded in the forex market is humongous. Being the most traded market, the value of it reaches up to $3 trillion. The number is made up of all the types of transactions performed in the market. The amount of different transactions is listed as follows:

$1,005 billion comes from spot transactions

$1,714 billion is added from forex swaps

$362 billion accounts for outright forwards

$129 billion for estimated gaps

Currency distribution in the Forex market

There are about seven currencies on which most transactions take place. Out of these currencies, the US Dollar dominates with around 85% of all the operations in the forex market. Next up in the line stands EUR, which is then followed by JPY and GBP. A graphical representation for the same is given below.

Here, the sum of all the variables totals to 200%, as currencies are traded in pairs.

What are the Foreign Exchange Reserves?

They are the assets that comprise banknotes, bonds, deposits, etc. The central bank of a country holds these with two primary purposes. One to maintain the balance payments of a country and the second is to control the confidence in financial markets. These reserves can be held in more than one currency.

According to the International Monetary Fund (IMF), 64% of the world’s forex reserves are made up of the US Dollar. And after USD comes GBP, JPY, and EUR comprising of 4%, 4%, and 2% of the world’s FX reserves, respectively.

Liquidity of the Forex market

Liquidity is simply the possibility to square off a position smooth and quick without causing the market to make a drastic move. In simple terms, liquidity is the level of supply and demand in the market. So, when there are large numbers of buyers and sellers in the market, we can call this market to be highly liquid.

With respect to the Forex market, it is the most liquid market in the world. This implies that the forex market constitutes a large number of participants (buyers and sellers). With high liquidity, one can liquidate their positions much faster and at their quoted price. Moreover, high liquidity causes the prices to move smoothly, gradually, and in small steps. Hence, this even leads to more consistency in the quoting of prices.

Below is the chart of EUR/USD on the 5-minute timeframe. We can see that the prices move smoothly in spite of being in a small timeframe.

Below is the chart of a small-cap stock in the US. Here, we can see that the prices are not moving in a flow, and there are gaps between the prices. And this is solely due to the lack of liquidity in the market.

That’s about the liquidity of the Forex market. We hope you had a good read. Check your learnings by answering the below quiz.

[wp_quiz id=”42489″]
Categories
Forex Basics

Supply, Demand and Liquidity as Drivers of Prices

Markets are “places” where people and institutions exchange assets. It may be stock shares, commodities, grain, livestock, or currencies, but all markets behave similarly. Buyers and sellers look for the

Markets are “places” where people and institutions exchange assets. It may be stock shares, commodities, grain, livestock, or currencies, but all markets behave similarly. Buyers and sellers look for the

Markets are “places” where people and institutions exchange assets. It may be stock shares, commodities, grain, livestock, or currencies, but all markets behave similarly. Buyers and sellers look for the best possible price. A buyer seeks to buy at the cheapest possible price, while the seller wants to sell at the highest price.

How prices move

If we order buyers and sellers by the price they are willing to accept, we could see some buyers are bidding an amount very close to the price sellers are asking, and from there, the distance grows in a kind funnel-like shape.

For a sell to occur, one of them must cross the bridge and accept the other side’s price. Also, when a seller moves and takes the ask price for the first time, the “Last price” moves down a little. If another seller does the same, there might be other buyers willing to buy at the same level or not. If there are more buyers at that level, the next seller who takes the ask does not create an additional downward movement. If all buyers disappear from this level, the seller should accept a worse price, moving the asset down, or hold until a buyer takes his bid.

Conversely, if a buyer takes a bid price for the first time, the price of the asset moves up. If other buyers get in and deplete this level from sellers, they should buy at higher prices or wait till a seller takes his ask price.

Supply and Demand

Demand

The demand for an asset decreases as the price increases. The rate of that decline depends on the need for the asset and also on the perceived future value of the asset.

Supply

The supply increases as the price increases. The rate of increment depends mostly on the sellers’ belief about the future price growth of the security.

Equilibrium

Supply and demand are what drives prices up and down. If there are an equal number of buyers and sellers, the price stays at one level and is said to be in equilibrium.

When there are more buyers than sellers, the price moves up until a new equilibrium is reached. Conversely, if the number of sellers is higher, the price moves down until sellers and buyers get the new equilibrium.

Fair Price

The equilibrium is the result of a consensus about the fair price of the security, but fair price changes with the passage of time. The change in fair price may come from technical factors ( overbought-oversold levels, pivot points, breakouts), economic reports such as interest rates, GDP, manufacturing, nonfarm Payrolls, and inflation, or unexpected news events. The new price does not manifest itself in a single and swift price movement because that price is not known at the time. That’s the reason for the appearance of trends.

Liquidity

Liquidity is the term used to define the number of buyers and sellers present in the market.

In a very liquid market, the number of buyers and sellers is vast. Large-sized orders do not affect the price much. Also, bid and ask prices get closer to each other because buyers and sellers compete among themselves to offer their best bid and ask prices. That means spread tightens.

A market with low liquidity shows a scarcity of buyers and sellers. The size and number of operations are tiny, and one small order can produce significant price variations up or down. Also, usually, spreads widen because there is less competition among participants. Low liquidity may cause market manipulations since it is easy to drive prices up or down.

Liquidity does not depend only on the market in question. It changes with the time of the day. For instance, the EURUSD shows less liquidity during the Tokyo session. Then it grows when the European exchanged opens, and it maximizes at the open of the US session. Finally, it fades after Europe closes its markets and traded volume declines further after the US closes.

Final words

  • Supply and demand drive the prices up or down until an equilibrium is reached.
  • The equilibrium breaks by a change in the perception of value by the parties trading it.
  • High liquidity is the key factor for tightening spreads and making markets flow without price manipulation.
Categories
Forex Course

3 – Reading & Understanding The Currency Pairs

Introduction 
From the previous lesson, we know that global currencies are traded in the Forex market. These currencies are exchanged in pairs. We also understood what Major, Minor, and Exotic

Introduction 
From the previous lesson, we know that global currencies are traded in the Forex market. These currencies are exchanged in pairs. We also understood what Major, Minor, and Exotic

Introduction 

From the previous lesson, we know that global currencies are traded in the Forex market. These currencies are exchanged in pairs. We also understood what Major, Minor, and Exotic pairs are. In this lesson, let’s discuss more characteristics of these currency pairs.

Out of the three types of currency pairs, the most traded type are Majors. These major pairs contribute more than 85% of the total Forex trading volume. Prices in these pairs move in tighter spreads, but they are a bit volatile during market opening hours. Major pairs are those who have USD in them. Some of the major pairs are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The other vital pairings which do not include the US dollar are known as ‘cross currencies.’ Some of these are GBP/EUR, EUR/CHF, EUR/JPY, etc.

Reading a Currency Pair

Since we are talking about currency pairs and the Forex market, it is essential to learn how to read them. Every currency has a three-letter symbol defined by the International Organization for Standardization(ISO), which is straight forward. Below is the terminology for some of the major currencies.

  • British Pound for GBP
  • US dollar for USD
  • Japanese Yen for JPY
  • Swiss Franc for CHF
  • Euro for EUR

To understand the reading of a currency pair, you need to know the meaning of base and quote currencies. The first currency in a Forex pair is called base currency, and the second one is called quote currency. As we know, trading the Forex market involves selling one currency to buy the other. For instance, we sell the base currency to buy the quote currency. Let’s say you are trading USD/CAD. USD is your base currency, and CAD is your quote currency. Here, when we are executing a sell trade on this pair, we are primarily selling USD to buy CAD. And vice-versa if you are placing a buy trade.

How much one unit of the base currency is worth against the quote currency defines the price of a pair. In the above example, if USD/CAD is trading at 1.32267, that means one US dollar is worth 1.32267 Canadian dollars.

Liquidity of Major Pairs

Liquidity in these pairs is the highest when compared to other pairs. The larger the import/export value between two nations, the more liquid the currency pair of these countries will become. EUR/USD is the most liquid pair in the world. Major currency pairs should not be confused as the best currency pairs to trade. Trading a particular currency pair depends more on strategy and market sessions. When we say ‘major,’ we mean the most actively-traded Forex pair. The six most actively-traded Forex pairs are:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CAD
  • USD/CHF
  • AUD/USD

One of the reasons behind these currencies being traded so extensively is the political and economic stability associated with these currencies. Big investors feel it is safe to park their money in such economies.

What Should You Trade?

If a currency pair has high liquidity, the volatility of that pair decreases. Currency pairs that are linked with the market openings should be our first choice. For example, it is recommended to trade the US dollar during New York open or trading the Australian dollar during Asia opening, as there will be good volatility during this time. Also, consider economic news releases, technical chart analysis, and other events while choosing the currency pair to trade. For people who have just begun their Forex trading journey, it is recommended to start trading major currency pairs before experimenting with minors and exotics. Now try answering the below questions.

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