Forex Liquidity

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  • 04 January, 2011 GMT

By: Charley Warady

Particularly for the day trader in Forex, the constant action and fluctuations are what make the game appealing, and it's all about Forex liquidity. The changes in trends; the riding of the trends; the reversals of positions; and even the quick stop-loss holds everyone's noses close to the computer's screen(s). And the beauty is that you can jump from Forex pairing to Forex pairing and have more balls in the air than the best juggler. Sure, the risk is more, but so are the opportunities!

Speed doesn't kill

Believe it or not, the situations listed above aren't the most dangerous times for the Forex trader. For obvious reasons, there are no real “safe” times for the Forex trader, but like everything else, it's all relative and it all depends on Forex liquidity. The most dangerous time for the Forex trader is not when the markets are wild, the Forex liquidity is great, and there are massive fluctuations in the market. Those are the good times. Those are the times when it's easy to get in and easy to get out. When you can cut a loss short and ride a profit comfortably. Those are the times that grab your attention and don't let it go, because a brief lapse could mean a missed opportunity or a sudden loss.

Even the markets take a break some days and the Forex liquidity goes down. There are days, for as many reasons as there are days, that there is what seems to be an interminable amount of inactivity in the markets. It could be that pending news is due out. It could be a Fed report is being released. It could be the banks are gearing up to do something big; or nothing at all. It doesn't matter. The reasoning behind the lack of Forex liquidity shouldn't be the concern of the trader.

This inactivity in Forex liquidity is possibly one of the biggest land mine zones for the Forex trader. Traders want to trade. It's as natural as fish swimming or football players taking steroids. But the inactive market can pose the biggest potential for loss simply because of its inactivity. What generally happens is that a trader places a trade and the market moves against him or her. A slight bit. Nothing much. But then it stays there. The lack of Forex liquidity convinces the trader that they're wrong, so not only will they get out of the trade taking a loss, but will reverse the trade thinking the trend is going in the opposite direction. And the cycle begins.

Walk away

The solution is simple, but not easy, and only involves two words: “Walk away”. The market isn't going anywhere. It will be there tomorrow and the day after. Go play golf. Go for a walk. Solve world hunger. Anything that will involve just walking away. If you insist on trading at all, have a game plan and don't try to day trade. Place a trade and put stops on both sides of the trade. And then...walk away. If you sit there and watch the screens it is a sure bet that you're going to change those stops or get rid of them entirely.

There will be plenty of days of Forex liquidity, and you'll be there to take advantage of them. But some days...even the markets need a day off.

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