Market liquidity

Liquidity refers to the ease and speed with which we can buy or sell a specific asset at a more or less fixed price. If we talk about our day-to-day, a person or business is considered liquid if it can meet its most instant financial obligations.

 Why is it important in trading?

-Firstly, because the more liquid the market is, the less risk we will suppose since there will always be someone willing to buy or sell.

– Secondly, the more liquid the market, the more contributors it will attract, which will always ease the opening of various operations, depending on our interests.

In trading, liquidity can influence the spread that we pay the broker to operate a specific tool. When gauging market liquidity, a liquid market has several daily operations and is made up of several active traders. This will narrow the difference between ask and bid prices of a given financial asset and, therefore, the spread will be smaller. These are reasons why market liquidity is significant.

Which markets are the most liquid?

Forex

The Forex market is open 24/5. It opens on Sundays at 11 pm, Central European Standard Time (GMT +1), and closes on Fridays at 10 pm.

Currencies are traded in pairs. Forex pairs are divided into 3 categories according to their trading frequency and volume and, therefore, their liquidity:

Majors: (USD, EUR, JPY, GBP, CHF, CAD, AUD, NZD)

Minors: include 3 major currencies: GBP, EUR, and JPY

Exotic: MAD (Moroccan Dirham) or QAR (Qatari Rial)

The pairs formed by major currencies are the most liquid because they are the most traded.

Raw materials & Commodities

The  liquid commodities are those that are traded most frequently:

Metals:

Gold is the most liquid. it is considered a safe-haven asset.

Coffee:

The 2nd commodity market with the highest trading volume, behind oil.

Petroleum:

The trading volume is very high and, therefore, many buyers and sellers ease liquidity.

The crude is used to make plastics, fertilizers, and even cosmetics.

Stocks:

The most liquid stocks are those with the highest trading volume. Those that can be exchanged fastly because many sellers and buyers are operating with them.

Which markets are the least liquid?

Homes: The price of a house depends on supply and demand and the current economic cycle. 

Cars: each year that passes its price drops when calculated taking into account its age.

Electronic devices: (mobile phones, TVs, computers, etc). Like cars, these assets depreciate with use.

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