The trader’s profitability in the financial market depends on many factors. The first of these is the choice of a platform for trading on the exchange. Choosing the wrong broker can lead to losses. Whichever platform you choose, liquidity and volatility are key factors in choosing an asset to trade. Below we will look at the main concepts and what it means.
What Is Volatility?
Volatility is an indicator in the forex market that shows the dynamics of price changes. In the forex market, «volatility» reflects a measure of the risk of a financial instrument over a certain period of time. When trading any trading asset, there is a concept of volatility, which means a change in prices over a period of time.
Each asset has some volatility at certain times, that is, it shows price differences over a certain trading period. Market volatility is a statistical indicator of the trend movement over a certain period of time. Market volatility measures upward and downward price movement. Volatility is calculated on the basis of past price fluctuations. The value of future volatility cannot be calculated, as it depends heavily on the emotional state of market participants.
Analysts can use volatility to estimate the likelihood of a price change on a given date. Thus, the trader evaluates the expected changes in fluctuations and the possible risk. To predict the future behavior of an asset, traders mainly use historical volatility – the range of changes in the exchange rate at a particular point in the past. The predicted volatility in zero approximation sets the price band in which the currency rate will change within the selected time interval.
What Is Liquidity?
As well as volatility, we often hear the term liquidity. Liquidity means an assessment of the activity of market participants, transparency and the volume of trades. Therefore, the more often there is a trade to buy and sell a financial asset using current prices, the larger its volume, the higher the liquidity. In order to provide liquidity, both buyers and sellers must be present in the market. Greater liquidity in the financial market makes the flow of trades easier and pricing more competitive. All traders prefer higher liquidity as it provides low spreads and therefore allows you to trade without delays. The most liquid Forex currency pairs are: EUR/USD – EUR/JPY – USD/JPY – GBP/JPY – GBP/CHF – USD/CHF – GBP/USD and some other options.
A liquidity provider is a broker or institution that acts as an intermediary for a selected asset class. In simple terms, the liquidity provider acts as a guarantor for your trades. He sells and buys certain assets at selected prices and thereby «creates a market». If you are trading a currency that is highly liquid, you can buy and sell in large lots without any problems. The main actors here are large banks and financial institutions that supply liquidity to many forex brokers:
- Deutsche Bank;
- Barclays Bank;
- JP Morgan;
- Societe Generale;
- BNP Paribas;
- Credit Suisse;
- Morgan Stanley;
- Goldman Sachs.
Many brokers try to work with many large liquidity providers to maintain their own liquidity and offered prices. In addition to traditional market makers, other important liquidity providers are large investment and commercial banks, hedge funds and other financial institutions. The global forex liquidity provider is Deutsche Bank, also known as a leading retail and investment bank. Highly skilled traders, speculators, and currency futures producers are also liquidity providers.