Liquidity of a currency (currency pair).

Quite often, a Forex trader encounters a broker's message: "Due to low liquidity, the spread on such... currency pairs will be increased." What is currency pair liquidity and what factors influence this indicator?.

Currency liquidity is the amount of supply and demand for a given means of payment, its popularity among sellers and buyers, that is, how quickly you can exchange a given currency for another.

The main prerequisites for high popularity are exchange rate stability and the demand for a given currency. Therefore, the most liquid currencies are those that can be exchanged regardless of location or time of day. For example, the euro, US dollar, British pound, Swiss franc, and Japanese yen.

To determine the most liquid currencies, simply look at the display at any exchange office in your country; the answer to this question will be clearly stated there.

The liquidity of a currency pair is based on the same principles: the more popular the currencies it comprises, the higher the liquidity of that instrument. This plays a significant role in trading, as it influences the spread (the difference between buying and selling). The lower the spread, the more profit a trader can make per trade.

In forex trading, in addition to overall popularity, liquidity is also affected by time. Some currency pairs experience the highest volume of trades during the day, while others are more popular at night. Trading activity also drops sharply on the eve of holidays and weekends, significantly reducing the liquidity of currency pairs and, consequently, increasing the commission spread.

For example , the AUDCAD trading instrument typically has a floating spread of 1.5-2 pips, but on the eve of Christmas or New Year's, it can rise to 10 pips. Clearly, with such a high commission, short-term trading is simply impossible.

Therefore, it is advisable to refrain from opening new trades during such periods. To control the floating spread, you can also use the Spread Indicator .