Forex Liquidity Indicator
Aug 25, 2021
Forex is the most liquid market, as fiat currencies are assets you may purchase or sell instantly by the market price. On the other hand, professional traders understand that the notion of liquidity is exceptionally important while making FX deals. How to understand this notion, and when are fiat currencies not liquid?
Liquidity and brokerage companies
While talking about Forex Liquidity, we mean the depth of an order book offered by a certain broker. When a brokerage company has decided to deal with no liquidity providers (LPs), orders for less popular trading pairs are not executed instantly, and traders face price gaps.
Experienced and top-rated brokers prefer the partnership with reliable LPs that connect a company to the highest Liquidity Pool, making it possible to close a trader’s order instantly even outside the top-10 trading pairs.
Liquidity is an important criterion for both private traders and institutional market players; this is why top-rated trading platforms offer instruments to monitor liquidity levels.
What is a liquidity indicator in the Forex market?
As you know, the instruments of technical and fundamental analysis are the key ones to predict further price movement; meanwhile, professional traders take demand/supply metrics into account as well.
These metrics disclose the main liquidity levels and pools that take place in the FX market nearby support and resistance levels. A string of order types cumulates an asset’s liquidity there. This is why institutional investors drive prices into those areas, creating new liquidity levels. When support and resistance levels are held for a long time, the highest liquidity is cumulated above or below those levels.
When the chart displays the growing liquidity, such a level becomes an attention magnet for major players, and there is no doubt that the price will touch that level. Liquidity indicators are among the instruments provided by trading platforms MetaTrader 4 and 5, and these solutions are implemented by more than 50% of active brokerage companies.
What are the key recommendations for traders, monitoring liquidity indicators?
- Follow the liquidity levels, as they are going to attract the price sooner or later.
- Never open positions opposite to a liquidity level’s direction.
- During the price movement towards a liquidity level, there appears a high probability to cross that level.
- When a liquidity level is crossed, the reversal movement is quite a frequent consequence, as major players are not interested in a level anymore.
The importance of dealing with a reliable Forex liquidity provider
The notions of an LP and a liquidity indicator are rather different, as the indicator shows the interest of major players in a certain asset, while liquidity providers are responsible for quick execution of bid and ask requests.
Brokerage companies need to deal with Tier 1 LPs that connect a broker to major banks and hedge funds. Such a solution makes the spread close to 0 and excludes the risk of price gaps.