What is 'Liquidity' in Trading?
Liquidity simply refers to ‘orders’ in a market. A highly liquid market has a lot ofactive buyers and sellers within it whereas a market with low liquidity has less buy and sell orders available at any one time.
Highly liquid markets allow traders fast trade executions with minimal slippage, meaning good quote prices on buys & sells. It’s favourable to be trading high liquidity markets at all time.
Fortunately for us, the currency markets (forex) are by far the most liquid markets in the world with a daily value of around $5 trillion passing hands between buyers & sellers. This means we don’t have to worry about things like missed quotes and bad pricing but we do have to worry about something else….
Liquidity & Institutional Traders
The forex market has two main types of market participant: There are retail traders like me and you, independent traders looking to make a profit in the markets. And institutional participants too, like trading firms and banks who are trading extremely large orders of multi-million and sometimes billion dollar size.
When retail wants to execute a position they can. An order of 1 lot, 10 lots or 50 lots isn’t going to shake the market too much and we can generally get in and out of currency trades with little interference. But when it comes to the multi-million dollar orders of institutional traders things get tricky. Often the orders of these participants are simply too big to execute into a market. If they want to put in a billion dollar buy-order they need a billion dollars worth of sell-orders to provide them with the liquidity to enter the market. If they can’t get these orders executed to them in real-time, they need to take matters into their own hands….
Temporary Price Manipulation
If an institutional participant wants to enter the market on the sell-side they need to free up orders to allow them to execute their large short positions. The orders that they free up? YOUR STOP LOSS!
Markets move based on the battle between buyers & sellers, if a very large buy order hits the market a temporary short-lived bullish price move can happen. This can be utilised by institutional participants with huge capital by injecting buy orders into a market to temporarily run price over resistance levels, taking out retail sellers and freeing up all the liquidity of their orders into the market for the institution to sweep up. When an extremely large short orders is executed the market then tumbles down in the correct direction – leaving retail traders frustrated and institutional traders with large profits!
How to Benefit From Liquidity
Fortunately it IS possible to avoid being caught up in the losses brought about by liquidity and you can actually use it to your advantage if you understand how it works. I put together this video to show you how Liquidity works and how you can use it to your advantage:
MASTER Liquidity & Smart Money Trading
If you want to learn everything about liquidity and how to use it to WIN instead of lose, enrol in my trading academy and learn my step-by-step trading system that I use to catch trades like these: