How liquidity is determined

Hi,
I have recently joined babypips.com
I have interest in forex and started reading course on baby pips

I have come across a point and found it hard to understand:

From the perspective of an investor, liquidity is very important because it determines how easily price can change over a given time period. A liquid market environment like forex enables huge trading volumes to happen with very little effect on price, or price action.

can some please point me to right direction in understanding this

Thank you,
Kams

I’m not sure that somebody can explain liquidity better than the sentence that you quoted. Once you have experienced illiquidity, you will understand what it means. Perhaps its like describing the taste of a food like lobster. Words can’t do justice, you have to experience it.

The sentence you quote is true about the Forex markets 99% of the time, but if you try to trade during a major news event you will discover a situation with unpredictable, sudden large price changes. If you trade one of the exotic currency pairs (not the majors), you will see what lack of liquidity means even in normal circumstances. Yes liquidity is one of the advantages of trading Forex.

To the trader, good liquidity basically means that you will usually get the price you see on the screen. In an illiquid market, the price may say one thing on the screen, but when your trade actually gets executed, it may be a different price. In Forex, this can happen during news releases. Otherwise, during normal market conditions, liquidity is excellent.