Started by PocketOption, Jan 24, 2023, 07:52 am
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When trading in Forex the term liquidity is frequently thrown around. Access to liquidity and the function of a liquidity provider and that of a liquidity broker are often confused. For as basic as they may sound it is important to clarify terms so that you can be more familiar with the characteristics of these market concepts and the benefits they may offer.
According to the Oxford dictionary, the first definition of liquidity is "the availability of liquid assets to a market or company", being liquid assets understood here as "cash". Cash is thus seen to be as valuable as a liquid hence the term "liquidity". But, as you know, in the Forex or LXCapital, liquidity has a specific meaning, and ours is a different liquid.
Liquidity in Forex is used to describe the level of activity taking place in the financial market. This is very important when you trade different currencies, because the number of active traders buying and selling a specific pair, e.g. EUR/USD, and the volume being traded is very important in a speculation-driven market. The more frequently something is traded the higher its liquidity. The liquid of Forex is not cash but activity.
Not always does high liquidity or frequent activity mean higher prices. The activity may correspond to a falling price. Higher liquidity means faster changes and increased volatility, which drives down the spreads, and the cost of trading. As Fiat currencies are connected to governments, information pertaining to the country or government from where a particular currency comes may increase or decrease market liquidity
If more people trade the EUR/USD currency pair and at higher volumes than the YEN/USD, it means the first has more liquidity than the second. The reason why the foreign exchange market is so liquid is the fact that it doesn't close and is open 24 hours a day during weekdays. It is also a large market, with nearly $6 trillion turnovers each day. This means that even though certain markets may close around the world and liquidity fluctuates, there are usually relatively high volumes of Forex trading going on all the time.
A liquidity FX provider is essential when you open a Forex brokerage. This broker or institution is the one who sends and executes trades. This function has a revolving door purpose in the market selling and buying a particular asset class. Standing on each end of a currency deal makes the liquidity provider FX a market "maker". That's why he is called a liquidity provider--he provides and makes the liquidity the market requires.
A broker liquidity provider Forex should be an institution or individual above suspicion in order to meet the highest standards. It must be stable, trusted, and must have a depth of resources across a myriad of instruments. A good trading platform already offers liquidity solutions but that does not excuse you from doing your homework. As a broker, you should take some time to pick a liquidity provider, just like you would to choose a Forex CRM and run a detailed analysis of the pricing, economic efficiency, effectiveness of the trading infrastructure, surveillance of the IT systems, all the way to legal aspects including due diligence.
Here are some characteristics you should look for when searching for a liquidity FX provider. This is not so much a list of characteristics but a framework to get the ball rolling and you can ask the right questions when selecting a broker liquidity provider Forex.
The post All you Need to Know Before Choosing a Liquidity Provider appeared first on Leverate.
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