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Features of the Forex Liquidity Indicator

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The international foreign exchange market is a very popular tool for making money. Because the most liquid assets are traded here – fiat currencies. Any user can sell or buy this asset at the best possible price. Choosing a quality strategy and an accurate analysis of the market situation allows you to make good money. This is why many users are thinking about starting a forex business. But first, you need to learn more about the main factors affecting the success of the transaction. For example, liquidity. The trader must understand the specifics of this term and know when the currency is liquid.

Brokers and Liquidity Assurance

Liquidity is one of the main considerations when choosing a broker. Some companies decide to start a Forex brokerage without the help of a liquidity provider. In this case, the depth of the order book depends on the number of customers registered on the platform. This means that when making deals with unpopular currency pairs, demand may exceed supply. This situation leads to increased execution time and price slippage. Moreover, traders can get additional losses due to the lack of a quality liquidity aggregator.

This is why Forex prime brokers are committed to partnering with the best liquidity providers. Indeed, in this case, LPs provide access to large pools of liquidity and significantly increase the depth of the order book. Thanks to this approach, a trader can close any deal (even a large deal on an unpopular currency pair) almost instantly.

Liquidity is an important aspect that not only private traders pay attention to, but also large players in the segment. Therefore, brokers are trying to start cooperation with the highest quality and most reliable LPs.

Forex Market and Liquidity Parameter

Of course, every trader, when making a deal, must determine all the risks and make a fundamental analysis of the current market situation. The liquidity indicator is an important assistant to determine the direction of price movement. It is also important to pay attention to the indicators of supply and demand for the currency.

Thanks to these factors, a trader can predict the depth of the order book and understand liquidity in the foreign exchange market, and most importantly, determine the level of support and resistance. It is known that a large number of orders for a particular currency accumulates liquidity. Therefore, major players and investors direct prices to these segments. This approach creates new levels of support. Conversely, when both levels are dormant for a long time, liquidity accumulates above these indicators.

Another important tool to help close a deal on time is the liquidity chart. The growing numbers are attracting the attention of large investors. Because high liquidity allows you to be sure that the price will reach the required level. Unsurprisingly, the most popular trading platforms offer traders all the tools they need to keep track of their liquidity levels. For example, the MetaTrader4 and MetaTrader5 platforms, which are used by more than 50% of brokers around the world.

What features should a trader pay attention to when starting a business on Forex?

•         You need to monitor the level of liquidity. After all, this parameter affects the price.

•         Do not open positions opposite to the level of liquidity.

•         If the price moves towards the liquidity level, then there is a high probability that it will exceed this level.

•         The likelihood that there will be a reversal movement after crossing the liquidity level is very high. Because the big players are no longer interested in the current situation and maintaining the level.

Choosing a Quality and Reliable Liquidity Provider

Of course, the liquidity indicator does not directly depend on the liquidity provider. But LP is responsible for the fast execution of traders’ orders. A quality provider allows you to quickly complete a transaction with crypto or fiat currencies at the most favorable moment.

This is why brokerage companies should cooperate only with the best Tier1 LPs. Such providers guarantee quality intermediation between the broker and the world’s banks or large investment funds. Thanks to this, the spread is almost zero, the order execution time takes several milliseconds, and the probability of price slippage is excluded.

About the author


Bogdan Ralnikov

Bogdan Ralnikov is a FinTech Market analyst and Technology Advisor.