What is Liquidity and Volatility?
To new traders terms like these, can be confusing and you need to fully understand forex terms, in order to apply them to your strategies. Both liquidity and volatility are quite different, but they can affect each other.
What Is Liquidity?
Volatility in simple terms, is how quickly an asset can be bought and sold and converted into cash. A high liquid asset can be easily bought and sold in the market. Whereas if there are few market participants who are not trading frequently, it is a low liquid asset.
Why Market Liquidity Is Important?
– Market Liquidity affects how quickly stock positions can be opened and closed.
– In general, is less risky because there is always another trader who wants to take the other side of the position.
– A liquid share has a narrow spread
What is Volatility?
Volatility refers to how much a market’s price changes over a given period of time. For example, if the price of share fluctuates rapidly in a short time, it means that is a highly volatile share. Whereads, if the price of a share fluctuates slowly in a longer time, it means that is a low volatile share.
Why Market Volatility Is Important?
– Traders usually analyse the volatility index to determine investor’s outlook for a particular stock.
– If the stock is more volatile it means that there will bigger prices moves, which means there are more opportunities for profits.
– Volatility asses the performance of a stock
How Liquidity and Volatility Are Related?
– Market liquidity refers to the depth of buy and sell orders. A liquid market refers to one that can be bought and sold quickly.
– Volatility refers to the rate of change in the market. A volatile market is one in which prices change rapidly over a short period of time.
Which Markets Are The Most Liquid and Volatile?
The Forex market is the most liquid market whereas commodity market is less liquid because of the physical delivery of assets, which makes them difficult to speculate it.
Final Thoughts
Traders are hungry for price movements for potential opportunities in order to earn bigger profits. However, there is always the risk that the price will move faster than before.
Therefore, it is better to pay closer attention than usual and change tactics accordingly. Be prepared in advance, without doing anything under panic.
When you are not sure where the market is going, it is better to just sit back and watch. Periods of increase volatility pass and are usually short. Sometimes it is better not to trade at all when you are not comfortable and unsure.
