What is Liquidity in Forex Trading | TheForex7

What is liquidity?

The term "Liquidity" has several definitions in trading. The market itself is liquid, with it being open 24 hours a day Mon-Fri, and a daily turnover of $6 TRILLION +.

The liquidity you will hear about most often is a term used to describe how active and volatile a market is at a specific time, and how much volume and number of traders are active. We refer to that as volatility solely.

Our definition of liquidity in the market is inefficiencies in price action movement. Usually, a major fundamental release such as Interest Rates released by central banks or CPI and inflation figures cause a huge move in the market, this tends to leave a big void behind, this is where we would now say there is liquidity in the market.

For example; let's say EURUSD has been trading lower and lower for a couple of days, it's moved down 150 pips by Thursday. Thursday morning major news is released and by Friday's close, EURUSD has risen 375 pips from Thursday's news. Everyone in the market from last week that was shorting from Monday and didn't close their trades is now in major loss or their position liquidated. Meaning liquidity to the upside has been taken. Now we would say from the giant leap of 375 pips now the liquidity on the market is on the downside.

The other definition of liquidity we use is when we see a trap on support and resistance, like a double top or bottom retail candle setup. We would spot that in the market and would recognize that there was "liquidity beyond highs/lows"

So concluding, Evolves interpretation of where liquidity lies in the market is where we believe retails stop losses and stop entries to be. As the bank would look to liquidate those positions we are also looking to benefit from the moves.