Forex markets have no central exchange meaning they are open 24 hours a day, 5 days a week. There is over $5.3 trillion traded in forex markets on a daily basis making it one of the most liquid markets in the world.
However, some currency pairs are more liquid than others so we can measure a currency pair’s liquidity by simply looking at the difference between the buying and selling price. For example, let’s look at EUR/USD (Euro v’s US Dollar) which is the most liquid pair in the world. The current Bid Price (Selling Price) is 1.1269 and the Ask Price (Buying Price) is 1.1270 meaning there is a spread of 0.0001 or a 1 pip spread. The ask price will always be higher than the bid price otherwise arbitrage opportunities would exist. If we now look at NZD/USD (New Zealand Dollar v’s US Dollar) the current Bid is 0.6764 and Ask is 0.6769 meaning, there is a spread of 0.0005 or a 5 pip spread.
A pip is the smallest increment of change in a given market – when trading forex, it’s generally traded in increments of 0.0001 (1 Pip) with the exception of the Japanese Yen and Mexican Peso where a pip is 0.01.
Successful forex traders possess a thorough understanding of the size and liquidity of a given market and realise the importance of waiting patiently for trading opportunities to present themselves in line with their trading strategy. This instils discipline in the trader and ensures the individual is not deviating from a proven approach.
Generally speaking, when the market is trending it’s like an escalator and when it corrects itself it’s like an elevator. This is precisely why mastering a trading strategy is paramount to your success.