Glossary · What is forex?Liquidity
Liquidity is how easily you can buy or sell an amount without moving the price much. In a liquid market many quotes with real volume sit near the current price, so spreads are tight and orders fill close to the price you see.
EUR/USD at midday in London and a minor pair at the daily rollover behave very differently when you click buy. The difference is liquidity.
The what is forex lesson covers the busiest hours, and the slippage lesson shows what thin liquidity does to fills.
What makes a market liquid
A market is liquid when many participants quote prices with volume behind them. Each price can absorb a large order, and the gap between bid and ask stays small.
Liquidity changes by pair and by hour. Major pairs are deeper than minor ones. The overlap of the London and New York trading sessions is usually the deepest stretch of the day.
The daily rollover, the weekly open and major news are thin moments. Thin liquidity shows up as a wider spread and more slippage.
A worked example
Figures are illustrative. You send a market order to buy 5 lots of EUR/USD. At the best ask of 1.10010 only 3 lots are on offer, and the next 2 lots are offered at 1.10012.
Your order fills 3 lots at 1.10010 and 2 lots at 1.10012. Those 2 lots cost 0.2 pip more each, so the extra cost is 0.2 × $10 × 2 = $4.
In a deeper market all 5 lots might have filled at 1.10010. The Spread Checker shows which hours carry wide spreads, a sign of thin liquidity.
Questions
What is the most liquid currency pair?
EUR/USD has long been the most traded pair, so it is usually the most liquid. Even so, it thins at the daily rollover and the weekly open.
Does low liquidity make a pair riskier?
It makes trading cost more, through wider spreads and more slippage, and price can jump further between quotes, which adds to the risk of any position.
Leverage multiplies losses as well as gains; only trade money you can afford to lose.
More terms in this chapter
ForexForex (foreign exchange, or FX) is the global market for trading currencies. Every price is quoted as a pair, such as EUR/USD, and trading happens over the counter between dealers rather than on one central exchange.
Currency pairA currency pair is the price of one currency in terms of another, such as EUR/USD. The first is the base currency, the second is the quote currency, and the price is how much of the quote currency buys one unit of the base.
Base currencyThe base currency is the first currency in a currency pair, the one whose price is quoted. In EUR/USD it is the euro, so a price of 1.10000 means one euro costs 1.10000 US dollars. Buying the pair means buying the base currency.
Quote currencyThe quote currency is the second currency in a pair, the one the price is counted in. In EUR/USD it is the US dollar, so 1.10000 means one euro costs 1.10000 dollars. Pip value and profit on the pair are worked out in the quote currency first.
Exchange rateAn exchange rate is the price of one currency in terms of another. EUR/USD at 1.10000 means one euro exchanges for 1.10000 US dollars. On a trading platform every rate comes as two prices: a bid you can sell at and a higher ask you can buy at.
Long and short positionsLong and short positions are the two directions a trade can take. Going long means buying a currency pair to profit if its price rises. Going short means selling it to profit if the price falls. In forex you can sell a pair as easily as you buy it.
Learn it in full
Related terms