There are approximately $1.5 trillion in currency transactions each day according to the Securities and Exchange Commission. As a retail trader, you may be hard-pressed to find forex liquidity information on a daily basis, yet there are a number of free resources available. Forex liquidity is important to successful traders because it helps you determine where the action is, when to trade and which currencies to trade in.
Liquidity in the Forex Market
Unlike the stock exchange, which has a centralized location, the forex market is not centralized. Instead, the forex market is comprised of thousands of banks, brokers and traders transacting with each other but tracking volume independently of one another. This means retail forex traders are limited to the volume data provided by brokers to gauge daily liquidity, or are relying on averages to tell you which currencies are most liquid and when.
Broker Volume
When you open a forex trading account, the broker provides you with a trading platform to execute your trades. Most trading platforms provide an option to "show volume" on your charts. A volume bar, which is drawn at the bottom of the chart for each bar of price data, reflects how much money was traded during that time period. The volume or liquidity data shown only reflects your broker, not the forex market as a whole.
Level II Trade Screen
In an effort to become as transparent as other financial markets, many forex brokers offer Level II trade screens. A Level II screen allows you to see exactly how much currency is available at the current price as well as at levels above and below the current price. Seeing millions of dollars available to trade within several pips of the current price demonstrates that there is ample liquidity, while seeing only a few thousand dollars available for trade means that prices may be subject to large swings since there is little liquidity. The amount shown reflects the liquidity of your broker only.
Currency Pair Averages
Certain currency pairs always have ample liquidity available for retail traders. Approximately 25 percent of all spot forex transactions occur in the EUR/USD, or euro relative to the U.S. dollar, according to the Foreign Exchange Committee (FXC). With so much activity, most retail traders can be assured that there is liquidity in the EUR/USD at nearly any time during the trading week. Exceptions occur right around major scheduled news releases, as traders remove liquidity from the market and await the news release. Other highly liquidity currency pairs include the USD/JPY, GBP/USD, AUD/USD and USD/CAD.
Time of Day Averages
While certain currency pairs are liquid enough for retail trading throughout the week, the time of day still plays a large role in how much liquidity is available in each pair. Each currency is most liquid when a market associated with that currency is open. The EUR/USD is most liquid when European and/or the U.S. markets are open, while the USD/JPY is most liquid when the U.S. or Japanese markets are open. Trading a currency pair when a major market is open ensures that there is ample liquidity available for trading.
