Forex Market Liquidity – Chapter 2 | Learn Forex

What is Forex Market Liquidity?

In the financial realm, liquidity represents ‘how easy it is to buy or sell your shares, contracts, or, in this case, currencies’.

In simple terms, suppose one needs to buy some Euro with the US Dollar. Then, (s)he needs someone in the market who would buy his/her US dollar & give Euro in return.

To buy anything one always needs someone who would sell that particular thing. While selling it has to be vice versa. If one needs to sell a potato then, (s)he must find someone who would buy a potato. This supply and demand chain system is called liquidity.

More the participants available in a specific market, the more liquid that asset will be. The currency market exhibits the highest liquidity. Needless to mention that cryptocurrency is quickly gaining liquidity. Global businesses cannot function without cross-border currency transactions. Hence, there will always be a generous flow of supply and demand in the forex market.

Who provides Forex Market Liquidity?

The banks provide liquidity since all of our currencies get exchanged via banks. Based on the market supply and demand, availability of traders, banks decide the rates. Given is the list of the top Global Banks who are the major forex market liquidity providers.

Bank Name Country Total assets
Industrial and Commercial Bank of China China 24.14 trillion CNY
Mitsubishi UFJ Financial Group Japan 2.459 trillion USD
JPMorgan Chase & Co. United States of America (US) 2.5 trillion USD
HSBC Holdings PLC United Kingdom (UK) 2.374 trillion USD
BNP Paribas France 1.994 trillion EUR
Deutsche Bank Germany 1.591 trillion EUR
UBS Switzerland 935 billion CHF
Royal Bank of Canada Canada 1.2 trillion USD
ING Group Netherlands 845 billion USD
Commonwealth Bank Australia 933.1 billion AUD

* Total Asset Data based on 2016 records.

Given above are the top-rated banks from major countries. Based on the legal availability and regulation of banks, forex brokers take liquidity from different banks. Those brokers who work with the top-level banks are the best forex brokers. They provide the best price, especially if they have a non-dealing desk (explained later in Chapter 9).

Who are Forex Market Players or Forex Market Participants?

Forex market participants are the investors, traders who buy/sell currencies from the open market, through online transactions or Over the counter (OTC) facilities.

Based on the trading volume, different Forex market players are classified. They can also be Institutional Investors/Traders and Retail Forex Traders. Other types of market participants are Speculator, Supply Side, Demand Side, Professional, Investors & last but not least Novice traders.

types of forex traders
Different Types of Forex Traders (Market participants)

Institutional Investors:

They can be an individual or a group of people or any company or the bank that trades over a 1 million dollars account.

They generally execute almost 100+ standard lots per month or even per trading days. Banks are the biggest institutional traders as they trade billions of dollars per day.

Here, the currency taken is the dollar but actually, it can be any currency on a large range. Next comes the big trading firms that handle private funds from large investors. Institutional traders are primarily market movers. That’s why some retail traders prefer to follow bank trade levels or round numbered price levels (Explained later in the trading strategy section).

Retail Traders:

People claim that because the forex market is so big, it is relatively easier for forex traders to dive in and drive through the trends in this huge market, the world’s largest market. However, most forex traders trade in what is called the retail forex market; this is a different market (similar to a parallel universe) to the ‘authentic’ forex market in which $3 trillion is exchanged each day.
In reality, there are two markets in forex

  1. Interbank market, where banks, hedge funds, governments, and corporations
    exchange currencies, and
  2. Retail market, where most forex traders trade-in, which is an entirely separate market
    to the ‘real’ interbank market.

Broker assumptions:

In the retail forex market, one’s competition is the other forex traders trading the same, and, believe it or not, your broker. When one makes money in trading forex, these other traders in the retail market lose, and so does your broker.

Most retail forex traders do not earn money. Your forex broker will think that you are going to lose money in the long run. This is a perfectly reasonable hypothesis as the large majority of forex traders lose money.

The standard type of traders who control the lower amount of trading volume than institutional traders are the retail traders. It can be from $1 to $100,000. Several retail traders are normally higher than the institutional traders in the forex market.

They make up almost 80% of the market participants. Thus, if you are a retail trader, please do not be disheartened! A good retail trader with a sizable account and steady strategy can make a great monthly return.

There is a separate segment for both retail traders and institutional traders in all forex brokerage services. Institutional traders procure more benefits and; priority from forex brokers.

Such as personal account managers, VIP Accounts, FIX API Trading, lower spread, and commissions, etc.

Classification based on Success rate:

Would you love to know about the mystery that forex brokers don’t want you to know?

Here you go: Forex brokers divide all traders into two groups. There are the winners—who earn money—and then there are the losers—who lose money.

Losing traders:

Retail forex brokers consider that all new customers are unlikely to earn money, so all new accounts are put into the loser group. After some months of repeatedly profitable Forex trading, a trader might be put into the winner group. It may appear shocking, but it is the truth.

Considering most forex traders are losing traders, your forex broker assumes that you will not earn money when you open up an account. Simply after you have consistently gained money trading forex, will your broker be concerned with your trading. Those losing trades expand your broker’s pocket. All losing trades are ‘business profits’ for your broker. This is because your broker prefers the other side of your forex trade.

Winning traders:

After gaining money trading forex over several months, you will eventually join the winners. Your retail forex broker will work to hedge your trades. In other terms, if you enter the winner group, your retail forex broker will hold trades in the real forex market, the interbank market, to balance the profits collected by the winner group.

For example, if the majority of the traders in the winner group are determined to buy the EUR/USD, then the broker will set in a trade to buy the EUR/USD in the interbank market hoping that if the winners are accurate, the forex broker can utilize the gains in the interbank market to pay the winning traders. In this way, your retail forex broker deals with winning traders.

Classified by Market Time Spent:

It can also be classified based on traders’ time spent in the market.

Trader Type Trade Duration
Scalper Second to Minute
Day Trader Full Trading Hours for the day
Swing Trader One day to week
Position Trader Month to Year
Investor Buy and Hold for value

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