How to find liquidity in the forex market?
In this article you are going to learn the best way to find liquidity in the forex market. At the end of this article, you know exactly what fx liquidity is, how forex liquidity works and how you can use it to your advantage. Take notes and use the information wisely. Let’s get started.
What is liquidity in the forex market?
Before we dive deeper into how to use forex liquidity, which you will learn later in this article, let’s explain exactly what liquidity is.
Liquidity means the ability for a market to be traded efficiently. That’s how I define liquidity in markets. Highly liquid markets mean transactions can be done smoothly. Illiquid markets are harder to trade as it’s harder to get an efficient fill on your orders.
You have to view it like this: if you want to buy a 1 lot, someone needs to sell you a 1 lot at that same price. If a market is liquid, there will be plenty of orders resting to fill your order. If a market is illiquid, this won’t be the case, which causes slippage in pricing. This means your order gets filled at a higher price, so you buy at a more expensive price. Of course, 1 lot is not how it really works, but you get the idea.
So: fx liquidity, or liquidity in the forex market is key to understand for efficient order flow and transactions. By analyzing areas of liquidity, you can get a great idea of the order flow and you can use that to your advantage when trading forex.
But, why is this even important to know?
Why use liquidity in forex trading?
You should use liquidity because it works and it’s essential to understanding the big picture in the markets. You see, bigger players need liquidity. The forex market is highly liquid, but if bigger players trade huge size in illiquid markets, this can become an issue. If they want to buy 1000 lots long, but 100 lots are selling to him, that’s a problem as the rest of his order gets filled at a higher price. This won’t happen often in forex, but it still can happen.
Bigger players need to play around this. How?
By splitting their orders & by trading at areas of high liquidity.
Well, how does that work?
Order splitting
When a big player in the market needs to enter a huge order, he tends to split this up. How does that work? Let’s say he needs to buy 10000 lots for whatever reason. Then he can split that order up in 500 lots, or even less. Often, they have algorithms to do this. They scale in their orders until everything is in the markets. This can be done under the radar.
Trading at areas of high liquidity
Trading at areas of high liquidity is another way bigger players can efficiently fill their orders. How does this work? Let’s say you have a trading range. Below the trading range is where people that buy often place their stoploss. The stoploss of a buyer is a sell order. If a big player wants to buy, buying when a lot of people are forced to sell is an excellent strategy. Stick around, later in this article I will show you examples of this.