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Why Is Liquidity So Important?

Have you ever run into the word “liquidity” while reading a financial report? It’s a term that gets thrown around by forex analysts all the time. Understanding liquidity can help you choose the right order types, which leverageto use, and how long you should keep your orders open. Soon you’ll understand the relationship between liquidity and volatility. Take your trading skills to the next level with this introduction to liquidity.

So what is forex liquidity and why should you care?

Liquidity is a measure of how easily a forex currency pair can be traded. Investments that can quickly be converted into cash are said to have high liquidity. The forex CFD market is liquid by nature, and traders can open and close trades in just a few clicks.

 

In contrast, real estate investment is much less liquid—especially during times of economic uncertainty. People selling a property may have a long wait until they can convert their investment back into cash, which is probably why forex has become so popular as an investment vehicle. Since liquidity indicates a safer or less volatile investment option, you might want to build your trading skills by limiting your trades to high liquidity currency pairs.

How can you find high liquidity currency pairs?

So you’re looking for a currency pair that offers the benefits of liquidity. Trading volume is a good indicator of liquidity. Trading volume refers to the amount and size of the orders being placed on a given currency pair. The more volume, the more stable the price line. The eight currency pairs with the highest volume and therefore liquidity are: EURUSD (Euro vs US dollar)

USDJPY (US dollar vs Japanese yen)

GBPUSD (British pound sterling vs US dollar)

AUDUSD (Australian dollar vs US dollar)

USDCAD (US dollar vs Canadian dollar)

USDCNH (US dollar vs Chinese renminbi)

USDCHF (US dollar vs Swiss franc)

EURGBP (Euro vs British pound sterling)

So now you know which pairs are favorably liquid, but why is this important? To better understand how liquidity influence prices, let’s scale everything down. Imagine that the liquidity for EURUSD comes from just 100 traders. One day, five people don’t make any orders. Trading volume shows a drop of around 5%. Prices will adjust, but nothing major will happen on the market. Now let’s consider an exotic currency pair like USDSEK. This time, only 10 traders generate the liquidity. One day, five traders don’t make an order. Trading volume drops by around 50%. Prices will adjust rapidly, and dangerous volatility will follow.

It all starts with volume

Let’s look at a real world example to demonstrate how volume changes the behaviour of the currency and price moves. Imagine three vehicles. A car, a bus, and a ship. The car represents those currency pairs that don’t get a lot of trading volume. Cars can be fast, light, and more maneuverable. The car can rapidly swerve or change direction, and even turn around at a moment’s notice. Because of the  limited volume, you can expect a wild ride when trading the “smaller” currency pairs. The bus is a heavier vehicle and much less maneuverable, and it carries a much higher volume.  It’s not the most popular choice for traders, but the higher volume still offers a slower, less-volatile ride.

The ship is by far the slowest at making course changes. Ships have massive volume compared to other vehicles. These “bigger” currency pairs are traded by many, enjoy endless liquidity, and make for a much smoother ride.The eight listed currency pairs above could be considered “ships”. Major currency pairs have massive volumes, and a change in direction is usually slow. The charts appear smoother with fewer spikes. Simply put, the more liquidity, the more volume, the slower the price change. The exception to this is when something “big” happens. When a nation makes a political or economiceconomic announcement that traders perceive as “bad for business”, investors can make the same conclusion at the same time and abandon the vehicle, destabilizing it as they go..

Example: When the UK announced Brexit in 2016, GBP investors everywhere probably came to the conclusion that a non-EU destination would be economic suicide. GBP investors started jumping ship, and sterling started sinking. Some traders stayed loyal and hopeful, and they are now battling a stormy or volatile transition.

Top tip for high liquidity traders

Trading high liquidity pairs means you can use wider ‘Take Profit’ and ‘Stop Loss’ settings. You might also consider a higher leverage depending on how stable the currency pair is. When checking for price reversals, sharp moves can be misleading. Make sure there’s plenty of volume behind the change. Whichever currency pairs you choose to trade, always take liquidity into consideration before setting leverage and stop orders.

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blog19

Bars, Lines, or Candlesticks? Reading Forex Charts Like a Pro

Are you struggling to find trading opportunities when you use fundamental analysis? News reports and eco releases can be strong influencers of market price, but sometimes they don’t give a clear enough indication of what to trade, and more investigation is called for. Time to check the forex charts!

Some traders use indicators to make sense of price history, while others prefer to “eyeball” the situation and make their own conclusions. Either way, it comes down to technical analysis and recognizing patterns in the price history, which brings us to the topic of this article. Which forex chart type reveals more? Should you use lines, bars, or candles? Here’s a simple breakdown of those options so you can start using the one that best suits your trading style.

Line charts

Right-click on an open forex chart and you’ll see three viewing options: lines, bars, and candlesticks. Lines display a currency pair’s price history in a much cleaner way. Lines track a simple straight line between the opening price and the closing price. Anything that happens between those two points will not be visible on a line chart. Since line charts don’t show the daily highs and lows, it makes them better suited to long-term analysis offering a wider simplistic overview. If you are planning to keep an order open for more than a week, then lines give a much cleaner picture from which to base forecasts. For short-term orders that present a risk of volatility, a bar chart is much more informative.

 

Bar charts

Like lines, bars also show the opening and closing prices, but bars display price highs and lows. The lowest and highest levels on each bar represent the lows and highs for the selected period. To the left of the bar is the opening price, to the right is the closing price

Most traders find bars harder to read than price lines, but there are certain advantages to using bars when performing technical analysis. When setting ‘Stop Loss’ (SL) and ‘Take Profit’ (TP), it can be useful to indicate just how extreme the lows and highs are compared to the closing prices. If the bars are long, but the opening and closing prices are crammed closer to the middle, it can mean that the selected period is experiencing price volatility. Extreme highs and lows tend to prematurely trigger a tight ‘SL’ or ‘TP’ order. If you’re opening a trade for the day, check the previous candlesticks to see if the wicks were far from the open and close? Set your ‘SL’ or ‘TP’ accordingly.

 

Candlestick charts

Candlesticks are probably the most popular way to view forex charts. This type of chart shows the same trading information as bars, but many traders prefer the style and insist that they are easier to read.

CSimilar to bars, the candlestick body shows the opening and closing prices, and the wicks that are sticking out of the top and/ or bottom represent the highs and lows of the selected period. The direction of the price for the period is shown by the color used. The most popular contrasts being green for a rise and red for a fall, but this is a completely customizable feature.

Just remember that the highs and lows never change, but the opening price on a candlestick switches place whenever the price direction changes. A rising trend opens on the bottom. A declining trend opens on the top. Candlesticks take a little getting used to, but when you do, there are dozens of patterns to watch out for that have a history of indicating rally moves or crashes.

 

So which forex chart is better for forecasting?

 

Take a look at the three forex chart screenshots in this article. Which one seems the easiest to read or analyze? It’s really down to your own personal preference. Lines are great for a quick and easy overview, but they show much less when you’re looking at a one-minute timeframe. Consider using lines for long-term trading analysis or quick checks on how a fundamental release is affecting market prices. If you tend to open and close orders in the same day, candlesticks might be a better choice.

 

Test your analytical eye on the foreign exchange market

 
 

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Want To Trade Forex Like An Expert? Plan Your Profits

Why Letting Profits Run Can Sometimes Pay Off

Just as many forex traders are too slow to cut their losses, many are also too quick to close their trades to claim their profits when a trade does go their way. Closing a trade too early prevents you from taking full advantage when, for example, a major market shift occurs in your favor. How do you avoid missing out? First, you can use an analytical tool like average true range (ATR) to predict periods of volatility in the market before they occur. How to recognize this? One sign can be periods of unusually low volatility. These often precede big swings up or down in the price of an item. When this is the case, you can use trailing stops, an automatic stop-out order you set with your broker where the limit follows the price upwards, or you can cash out only partially as your profits mount.

 

Top Tip: Learning when to let profits run takes planning, time, and experience — but is well worth doing

 
 
 

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Want To Trade Forex Like An Expert? Keep A Journal

How Keeping A Journal Can Help You Grow And Improve As A Trader

Why? Simple. A journal is an invaluable tool for thinking through opportunities and risks, as well as for growing emotional self-awareness — a key part of trading.

A good trading journal should used for two purposes:

Use Number 1: Separating Facts From Interpretations

First, it should contain an analytical section where you can explore market facts and your interpretations of those facts. What do I mean by facts and interpretations? The highs and lows a currency pair reaches over the course of three days is a fact. So are the cost of spread, commissions, and amount of leverage you are using. However, the belief that the market may trend one way or another or the market will be strong or weak — these are interpretations. Learning to tell the difference between the two — and to question your interpretations — can lead to smarter, better forex trades. It can also help you spot opportunities you might otherwise have missed.

 

Use Number 2: Building Your Mental Game

Second, your journal should contain a section where you explore your thoughts and emotions towards the forex market and your performance on it. You should ask yourself questions like “What am I feeling right now?”, “What trading decisions do I normally make when I feel this way?”, and “What has usually been the result in the past? Did I lose or make money?” Exploring your emotions in this way can be a great way of developing emotional self-awareness and recognizing the many ways your emotional state impacts your trading — both are key traits of superior traders.

Top Tip: Keeping A Trading Journal Can Be Key To Your Development As A Trader

 
 

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Want To Trade Forex Like An Expert? Control Your Environment

Why  Building A Supportive Forex Trading Environment Is Important

What do I mean by supportive trading environment? I mean that no one exists in a vacuum. Many things outside the actual forex market itself — from the physical environment you trade in to your personal circumstances at the time you are trading — can impact your trading performance. Maybe you have skeptical family members that are giving you a bad case of performance anxiety. Maybe you don’t have enough funds in reserve, which causes adverse anxiety and pressure that impacts your performance. Whatever the reason may be, the outside world impacts your performance just as much as market conditions.

Top Tip: The Outside World Matters

Knowing what outside factors impact your trading performance — and setting up your environment to support your best performance — can be a good way to improve your trading.

 

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