See definition from beginner lesson below. I ask, what happens to liquidity if the amount of active traders Buying/Selling a currency is greater than its total volume?
Example 5000 traders buy/sell $1 USD/GPB
Versus 5 traders buy/sell $10,000 AUD/JPY
So technically the AUD/JPY has more liquidity?
“In forex, it’s based on the number of active traders buying and selling a specific currency pair and the [volume]being traded.
The more frequently traded something is, the higher its liquidity.”
In your example 5,000 traders provide more liquidity than 5 traders. So, AUD/JPY would be LESS liquid because there are not as many people available to buy and sell.
It’s the number of traders that counts, not the value of each trade. You have a better chance of selling something to 5,000 people than you do to only 5 people, right?
5,000 x $1 = $5,000. 5 x $10,000 = $50,000. The volume of AUD/JPY is greater but the liquidity (number of potential traders) is less.
Remember also that liquidity measures how easy it is to get in and out of the market. So, a market with 5,000 traders is easier to buy and sell in than a market with 5 traders.
There are a lot of terms related to Forex. It is hard to remember all of them in one go. Keep a list of all the terms and revise them whenever you can.
It is easier to buy and sell in a market that has more number of traders than in a market that has a lower number of traders.