"Undestanding liquidity in Forex trading: Full guide"

 

What is Liquidity?

Forex trading has emerged as one of the most popular forms of trading in the financial markets. The forex market's liquidity is one of the reasons behind its popularity. It is the largest and most liquid financial market globally, with over $5 trillion traded daily. The liquidity of the forex market has made it an attractive avenue for investors, with a vast array of trading opportunities available.

Liquidity refers to the ease with which a trader can buy or sell an asset without significantly affecting its price. In the forex market, liquidity is the ability to buy or sell a currency pair at a fair market price. Liquidity in the forex market is essential for efficient price discovery, allowing traders to enter and exit positions without difficulty. Moreover, the presence of liquidity in the forex market ensures that traders can always find a willing counterparty to take the other side of their trade, now of course this is an issue for people who trade large capital, they need liquidity to execute their positions. Now as a retail forex trader, you also need liquidity, but you are rarely worried about its shortage, you can easily enter and exit trades many times. So now you might be wondering how all of this applies to you, does it even matter if you know about liquidity. First of all, yes it matters. Large institutions are seeking liquidity so that they can either buy or sell, now if where liquidity resides, is where institutions and banks buy or sell, wouldn't you want to know where to find liquidity, knowing when the big guys are buying and selling, who wouldn't want to right. That's the purpose of this article, consider this a full guide to liquidity in forex trading

In this article, we will explore the significance of liquidity in the forex market, the factors that influence it, and how to manage liquidity challenges that traders may face. We will also provide some tips for maximizing profits with liquidity in the forex market. Whether you are a beginner or an experienced trader, a solid understanding of liquidity is essential for success in the forex market. So let's dive in and explore the world of liquidity in the forex market.

Why is liquidity important for retail traders?

A lot of us want to trade like the banks, like the institutions, we want to know, where are they getting in and where are they getting out of trades. Imagine getting a trade signal from an institution or a bank all the time, wouldn't that be a dream come true? As traders we don't care about how much liquidity there is in the markets, large institutions do, and banks do, so what should we care about, we care about where liquidity is, we don't care about its size, where is it in the market place so that we can take advantage of it. Now, this whole process of liquidity is 100% technical based, there is no fundamental research involved, you just need to know where to find liquidity on a price chart. The real question is, why is identifying liquidity important? We already discussed about how banks and large institutions need liquidity to enter and exit trade, once you know where liquidity is on a price chart you'll know when these big guys are in and out. One other thing that makes liquidity areas important is that they act as magnets to price, price is attracted to those levels, so you'll also have the privilege of knowing where the market is likely to go next.

Where is liquidity on a price chart?

Now liquidity can also be identified as orders, buy or sell orders. Now think of it this way, say an institution wants to buy a certain asset, be it a currency pair or a bond and many others, for the transaction to be possible, the institution needs sellers to sell to them or else they will be no transaction, now that's where liquidity in the form of sell orders comes in, the sell orders make it possible for the institutions to buy the asset, these sell orders come in the form of sell stops and the liquidity is known as sell-side liquidity. The same applies to when to institution wants to sell an asset, it needs buyers in the marketplace, and that's when buy orders come in. These buy orders come in the form of buy stops and the liquidity type is called buy-side liquidity. Now it's already complicated for most of you, so ill not make it more complicated. Let's now Jump into the practical part, where do we find liquidity on a price chart?

Below are some of the areas of liquidity on a price chart, ones that you specifically focus on :

Old Lows

Old Highs

Relatively Equal Highs/ Clean Highs

Relatively Equal Lows/ Clean lows

Fair value Gaps

Old Highs

Now that is what an Old High looks like on a price chart, yes, it is not difficult to locate, but people misunderstand the significance of these levels. These levels are not support and resistance, on this site we provide knowledge on real support and resistance, what really supports price, and what really resists price, you can explore our Technical Analysis section in the menu area. These levels are price magnets, these levels attracted the price before it got there, this is how you know where price is going, you identify levels of liquidity first.

Old Lows

Now that's what old lows look like on a price chart, These are areas where the price is drawn to, not support and resistance. The sell-stop orders that we talked about reside there, That's where the price is heading. We have articles explaining exactly how to use these tools effectively in your trading, why they work, and other aspects as well, if you just head over to our Technical Analysis section in the menu bar.

Relatively Equal Highs

These Ones are not as frequent as Old Highs or old lows, but when you see them they can be a good indicator of where price could be heading next.

Relatively equal Lows

These are essentially the major levels of liquidity. For a start, you need to just mark these out on your chart anytime you see them, you can even use old data to see if price did not visit these levels more often. Reversals can occur after price reaches these levels, which is why sometimes basic support and resistance work but usually these levels are not meant to be respected, that's not their purpose, their purpose is to attract price beforehand. As a beginner you have the benefit of hindsight, use that to study these levels, you will get it in no time, and you'll beg for more of this ICT beauty. We have a separate Liquidity article, where we emphasize on Liquidity areas where we expect reversals, these are known as PD arrays, make sure to check it out, but study this first, for it is the foundation to greatness.

Key Take Aways

Liquidity is the open interest of institutions and banks to buy and sell in the marketplace. Liquidity is important because we basically know when the big guys are entering and exiting their trades. Identifying liquidity is 100% technical, no fundamental research is needed, although you can combine both in having a solid directional bias. There are 2 types of liquidity, sell-side liquidity, and buy-side liquidity. Buy-side liquidity is found 1) above old highs, 2) Above relatively Equal highs. Sell-side Liquidity can be found 1) Below old lows, 2) Below relatively equal lows. For ease of progression to this concept of liquidity, just start by identifying the levels we discussed in hindsight, meaning you look for them in old data and study exactly what we discussed.