Lesson #8 Liquidity of Forex Market

More or less $2 trillion is traded everyday in the spot Forex market which makes it the biggest and most liquid market in the world. The trading volume and transaction sizes absorbed in this market belittle the capacity of any other market. The futures market traders a puny $30 billion per day. Thirty billion?!! Peanuts! Due to its limited liquidity, the futures markets cannot contest. Positions can be liquidated and stop orders executed with no slippage except in exceedingly volatile market circumstance since Forex market is always liquid.

Forex is a 24-Hour Market

Trading starts as markets open in Sydney and Singapore at 2:15 p.m. EST Sunday. Tokyo market opens at 7 p.m. EST, then London at 2 a.m. EST. Lastly, New York opens at 8 a.m. EST and closes at 5 p.m. EST. It is a 24 hour seamless market since Singapore markets are back open before New York trading closes. This lets traders to react to favorable or unfavorable news by trading immediately. If important data comes in from England or Japan while the U.S. futures market is closed, the next day's opening could be a wild ride. (Overnight markets in futures currency contracts exist, but they are thinly traded, not very liquid, and are difficult for the average investor to access).

No Commission Fees Trading

The good thing in trading currencies is that no commissions are paid since transactions are done directly with the market maker via a purely electronic online exchange. Ticket costs and middlemen brokerage charges are also done away with. Yet there is still a cost to initiating any trade, but that cost is reflected in the bid/ask spread that is also present in futures or equities trading. Compensation for the brokers services are through the bid-ask spread instead of via commissions.

Price Guarantee in Forex

Under typical market conditions you can get a hold of rapid execution and price certainty when trading Forex. Contrary, the futures and equities markets do not offer price certainty or instant trade execution. The prices for fills for futures and equities on market orders are far from guaranteed even with the beginning of electronic trading and limited guarantees of execution speed. The prices referenced by brokers often represent the LAST trade, not automatically the price for which the contract will be filled.

Guarantee for a Limited Risk

For the reason of risk management the trader should have position limits. This number is established relative to the money in a trader’s account. There is less risk in the spot FX market since the online capabilities of the trading platform will automatically create a margin call when the required margin amount goes over the available trading capital in your account. No matter what the size or the nature of positions held within the account all open positions will be closed immediately. In the futures market, your position may be liquidated at a loss, and you will be liable for any resulting deficit in the account. That sucks.