Liquidity is a factor with the plus sign. The advantages of liquidity and the negative aspects of its absence were well understood by those who found the crisis of 2008 and tried to sell an apartment or house in this difficult time. These people were not lucky enough to get into a situation where they simply can not get out of the deal, even if they themselves want to. The reason for this is low market liquidity.
Simply put, liquidity is when you can liquidate your asset in a short time and with minimal losses. High liquidity is caused by a high level of demand and supply.
Here is an example of Apple iPhone. This phone can be called a liquid commodity. It can be easily sold, even second-hand, and not too low in price. He is in great demand, there are also many people who are ready to file him.
Liquidity is determined by how interested market players are: sellers and buyers. In other words, a large volume of demand and supply is a characteristic sign of a market with a high level of liquidity. And the higher this level, the faster and easier the player can eliminate the position in the market.
Forex, in turn, is often called the most liquid financial market. However, this does not mean that the currency is not affected by liquidity and its fluctuations - this factor is necessarily taken into account in strategies forex strategie traders. But those who start working on Forex with already existing experience in another market are always pleasantly surprised by the high liquidity ratio. Approximate calculations show that the daily turnover of the Forex market reaches four trillion US dollars.
A large turnover causes the exchange of large amounts of currencies, which is necessary for international trade. That is why money is the most liquid asset - they can vary for different goods and services. As you know, the US dollar is the most popular and popular currency in the world.
As for Forex, the liquidity indicator here is constantly changing during the working day. The reason for this is the beginning of the work of regional financial markets in different parts of the globe.
The highest liquidity falls on the period when the markets began to operate in Europe, especially London. The activity of forex players rises throughout the day and continues until North America enters the game. After the European auctions are coming to an end, the level of liquidity is sharply beginning to decline and ending at the end of the US market.
When liquidity falls, the market becomes more vulnerable to unexpected price spikes. The reason for this may be various news or even rumors. They, in turn, can lead to gaps and changes in quotations. Analyze the market and make some predictions of prices in such an unstable time is very difficult, so the risks at this time are extremely high.
The period of a low liquid market is fraught with sharp increases in volatility - this is a warning for those who will have open positions at that moment.
Highly liquid markets have a number of undeniable advantages, among which is the ability to analyze it and based on its results to make forecasts. Liquidity makes the market strong, it creates comfortable conditions for both sides and puts them in equal conditions. On the market with high liquidity, that is, price changes, even the largest player.