This article looks at the measuring of liquidity and volatility of foreign exchange rates trading instruments.
When you look at trading the foreign exchange rates you have to consider the trading instruments you are going to be using. The first point that you need to consider when you look at the trading instruments of the foreign exchange rates is the liquidity and volatility. You need to consider how this is measured and how it helps you when you trade. You should also consider the ways that these instruments will fill the orders that you place.
The Measuring of Liquidity with Foreign Exchange Rates Instruments
There are four points that you need to consider when you look at the liquidity that a trading instrument offers. These are the width, depth, immediacy and resiliency. When you look at all of these aspects you will be able to find the trading instrument that works for your foreign exchange rates trading.
When you look at the width you are going to be considering the spreads you get. The wider the spreads the lower the liquidity of the trading instrument will be. Of course, you have to consider that there are times when the spread widens so more money can be made from high volumes of trades.
The depth that you look at will be the depth of the market. This means the size and use of the market that you are going to be trading on. The larger markets will generally have greater liquidity than the smaller ones.
The immediacy looks at the order execution that you are able to get. If the instrument you are trading with has high liquidity then the order should be executed faster. Of course, there are some trading instruments that offer slow order execution regardless of the liquidity and you need to be aware of this.
The resiliency looks at the time it takes the market to bounce back after a large order has been placed. This is something you do not have to worry too much about when you look at the forex market.
The Impact of Liquidity and Volatility
The liquidity and volatility of the instrument that you are going to use will have a major impact on the trading that you can complete. If you are not using an instrument that offers very good liquidity then the order execution that you receive will not be what you need. There are three levels of order execution that you need to consider when you look at these instruments.
The first level is considered filled which means that the order execution is fast enough to avid slippage. The second is filled with minimal slippage and the last is filled with substantial slippage. The order execution that you want to get is the one that offers no slippage.
Slippage is the difference between the price that you place the order on and the price that the order is executed on. The larger the difference is, the greater the effect on your trading. Slippage can limit the profits that you make on a trade or cause you to miss your entry point completely.