Liquidity of a currency (currency pair).

Quite often, a Forex trader has to deal with the following message from a broker: “Due to low liquidity, the spread on such ... currency pairs will be increased,” what is the liquidity of a currency pair and what factors influence this indicator.

Liquidity of a currency 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 monetary unit for another.

The main prerequisites for high popularity are the stability of the exchange rate and the demand for a particular currency unit.

Therefore, the most liquid are considered to be currencies that can be exchanged regardless of the territory or time of day. For example, the euro, American dollar, pound sterling, Swiss franc and Japanese yen. In order to determine the most liquid currencies, it is enough to look at the display of any exchange office in your country; the answer to this question will be clearly written there.

The liquidity of a currency pair is based on the same principles; the more popular currencies are included in it, the higher the liquidity indicator of this instrument.

And this plays a rather important role when trading, because it is this indicator that affects the size of the spread (the difference between buying and selling). The lower the spread, the more profit a trader will receive from one transaction. When trading on Forex, in addition to general popularity, time also affects the state of liquidity; for some currency pairs, the largest number of transactions are made during the daytime, while others are more in demand at night.

Trading activity also drops sharply on the eve of holidays and weekends, which significantly reduces the liquidity of currency pairs, and therefore increases the size of the spread commission. For example , usually the floating spread for the AUDCAD trading instrument is 1.5-2 points, and on the eve of Christmas or New Year its value can increase to 10. It is clear that with such a commission short-term trading becomes simply impossible.

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