I am new to (Forex) Trading and just started with the offered online course. Here it says:
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.
While the forex market is relatively very liquid, the market depth could change depending on the currency pair and time of day.
My understanding of the market is that the more liquid the market is, the more volatile is the price. For me, this means, that the prices on the forex change heavily in terms of time an amplitude due to its high liquidity. Or is it the other way round? The more liquid the market, the less sensitive is the change in price?
High liquidity=easy fill=low spread.
Low " =hard fill=high spread.
Popular pairs, as Europe and United States, most popular and high liquidity, cheapest to trade.
United States and Mexico, not popular, cost you an arm and a leg to trade.
Yeah, i agree to your thought. Higher the liquidity means higher will be the beta .i.e. the responsiveness to prices. But you need to know how this liquidity and spread think works. In forex, a broker has various liquidity providers. Like for example there is forex broker ABC who has 16 banks, i.e., liquidity providers now the best ask price and best bid price from these banks will show you the spread. The more the liquidity will be the better will be the spread.
This is how ECN spreads work and there are very few honest ECN brokers around.
If there is no liquidity someone with large amount of money (let say 10 mil) can move the price in their desired direction. If there is enough liquidity they wouldn’t be able to influence the price so much.