How easily you buy or sell:deep markets take your order well.
The degree to which a currency pair can be quickly bought or sold without significantly affecting its price.
Major pairs like EUR/USD have the highest liquidity in the forex market.
In plain words
Liquidity is how easily something can be bought or sold in quantity without moving its price. In a liquid market there are many buyers and sellers with orders close to the current price; in an illiquid one there are few, and a single large order can shift the price.
See it move
Current price has reached Sellers’ orders
Why it matters
Liquidity shows up in the cost and quality of execution: liquid markets tend to have narrower spreads and less slippage, which is the difference between the price expected and the price received. It also changes through the day and can thin out sharply around major news or at the daily rollover.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A trader wants to buy 3 lots; sellers are offering 2 lots at 1.1001 and 5 lots at 1.1003.
- 1The first 2 lots fill at 1.1001
- 2The remaining 1 lot fills at 1.1003
- 3Average price(2 × 1.1001 + 1 × 1.1003) ÷ 3 = 3.3005 ÷ 3 ≈ 1.10017
Because there was not enough on offer at the best price, the order was filled a little higher on average than the first quote.
A common mistake
A market that is liquid most of the time is not liquid all of the time. Even the most traded pairs can show wide spreads and gaps for short periods.
Check yourself
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Educational information, not investment advice or a recommendation to trade.