For any level of trader on the global financial markets, there are a number of factors to consider when opening or closing trades. One of the most important is being able to get a handle on the current market conditions when looking at the various charts and indicators. The conditions within a particular currency pair, stock exchange or index can really affect how successful any trade you open is likely to be or if you will hit the expected return you target.
Liquidity is perhaps the major thing to know about with this in mind. In simple terms, it tells you if the particular market or asset you are looking at can be easily bought or sold. It can also tell you about the level of trading activity within that particular asset or market. High liquidity is often seen as the most beneficial to traders. This is because a market that is highly liquid has a high level of trading activity, which makes it easier to buy or sell assets on it. On the flipside, a market with low liquidity will be very quiet with not much happening.
What specific benefits does high liquidity bring to traders?
Helps to tighten bid-ask spread
If you have been trading for any length of time, then you will have come across what is known as the “bid-ask spread”. This simply refers to the price at which your broker will bid for an asset and the price that they will ask for it. In essence, it is one way that brokers make money on the trades you place.
Naturally for traders, you want as little difference as possible between the two so that you pay less to execute a trade – this is normally referred to as a “tight spread”. As high liquidity sees more market activity, it actually helps to tighten up the “bid-ask spread”, which is great news for traders. Of course, rather than relying only on high liquidity in any market, you should make sure to find a broker that offers tight spreads as standard. Whether you opt for reputable brokerage XTB, which has great spread prices, or another online broker, getting the best around is always worthwhile.
Greater price movement
A market that is highly liquid will mean that the price will be fairly volatile and move around a lot. This is great news for traders, as the only way that you can make money is from the price moving! Of course, you need to be on the right side of the trade and watch it go up, but a highly liquid market could see great returns. If you open a trade in a market that is not very liquid, then the price will not do very much as there are no other traders around to affect it.
This depends on the style of trading you like and your own personality. However, for a lot of traders, trading on markets that move fast and are volatile is actually what they enjoy. Many traders need the buzz of a market that is moving to gain satisfaction from what they do. For these people, high liquidity is a must so that they can operate in the conditions that motivate them. Buying into a market that has no liquidity will surely drive them mad with boredom as they spend all day watching nothing happening!
Works better with certain strategies
When it comes to trading professionally, there are many strategies you could use to make money. There are a few though that need high liquidity in the market to work. This makes a highly liquid market advantageous to traders who use these strategies. Scalping is perhaps the best example of this. As it makes use of ultra-quick trades and price movement to work, traders who use it need a liquid market to win.
A liquid market can be best
As the above shows, high liquidity when trading can deliver many benefits to traders. From simply giving more opportunities to make money to helping certain strategies work, it can be a valuable ally. It is this ability to help you succeed as a trader that makes high liquidity and observing the market conditions before you trade worthwhile. By getting a feel for how the market is operating at that particular time and that specific day, you can instantly get a feel for if you should even execute any trades at all. With this and other core trading techniques in place, you will be well placed to continue your trading journey for the long term.