Forex Trading: Understanding the World’s Most Liquid Market

Forex Trading: How the World’s Most Liquid Market Operates

Forex trading, which saw over 6 trillion USD exchanged daily in 2023, is the largest financial market globally. Its exceptional liquidity allows traders to execute transactions smoothly, 24 hours a day, five days a week.

What is liquidity in forex?
In simple terms, forex liquidity measures how easily a currency pair can be bought or sold. In a highly liquid market, traders rarely face difficulties finding a counterparty, as there is always a sufficient number of buyers and sellers.

How to assess liquidity in forex pairs
Traders can evaluate market liquidity by examining the bid-ask spread—the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a currency pair. A narrower spread generally indicates strong liquidity, meaning plenty of market participants are ready to trade at those prices. Spreads can differ across brokers depending on pricing models and markups.

For example, on the Deriv MT5 platform, major pairs like EUR/USD typically have tight spreads (e.g., 0.00005) due to their high liquidity, whereas minor pairs such as CAD/JPY show slightly wider spreads (e.g., 0.019) because of lower liquidity. Overall, forex spreads tend to remain narrower and more stable compared to many other asset classes.

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Another method to gauge liquidity in forex is by observing trading volumes. Higher volumes typically signal a greater number of buyers and sellers, which translates to increased market liquidity. Throughout a 24-hour cycle, trading volumes usually begin rising during the Tokyo session, continue to grow in the London session, and reach their peak in the New York session.

On the Deriv MT5 platform, you can display trading volumes on your charts by navigating to Insert > Indicators > Volumes > Volumes, as illustrated below.

Analysing the Forex Market
Traders looking to navigate the forex market should monitor both economic indicators and geopolitical developments.

One key factor is a country’s inflation data. When inflation comes in higher than expected, central banks may raise interest rates, which can attract traders seeking higher returns, boosting demand for that currency and potentially increasing its value. Conversely, as shown in the Deriv MT5 platform example below, lower-than-expected US inflation suggested the possibility of lower interest rates, making the USD less attractive to investors.

Geopolitical developments can significantly influence forex price movements. Political tensions, trade disputes, or conflicts between countries often trigger risk-averse behaviour, prompting investors to shift their capital to safer assets. Similarly, elections can create market volatility, affecting currency values.

Forex Trading for You
In today’s globalised economy, events around the world are increasingly interconnected. By keeping track of these factors and integrating them with other trading strategies, traders can improve their chances of making successful trades.

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