Market Liquidity Criteria
Frequently we hear about the advantages of Forex market, amid them there is a liquidity. What is liquidity? Liquidity - the capability of assets to be quickly sold at a price close to the market price. Liquid market - the market on which participants can transact without essential influence on the market price, they can act with large amount of money. How it is possible to see if the market is liquid or not? There are many varied criterion that can determine this.
One of the parameters of the liquidity is the price spread. Price spread - the difference between prices of supply and demand, prices of sale and purchase, prices of Bid and Ask of the holdings at a certain time. This difference is also called as the bank margin. Market is more liquid if there is narrow spread.
Another characteristics of the market liquidity is its tightness. This notion defines the deviation of concrete transaction price (demand price or supply price) from the average market price of already performed transaction. To measure the tightness of the market the value of the price spread is used. In this case, the price spread can be different kinds. For example, the most accurate measure of the tightness of the market is the effective spread, which is equal to the difference between the actual transaction price and the average price of the market at the time of transaction accomplishment. The transaction direction is also significant, because while there is a rise of prices on the market, the effective spread will be higher when you buy an asset than when you sell it.
Besides the liquidity of the market is indicated by its depth. Market depth shows the activeness of its members. It reflects the maximum transaction capacity with which an operation is conceivable without a significant influence on the current market price, also reflects the volume of orders at the market-maker at a certain time. Quantifying market depth is needed to determine the maximum volume of the transaction, which can be commuted without the advent of exception from the average market price.
The resiliency of the market demonstrates the speed at which price volatility induced by transaction conduction disappears or the speed of elimination of the imbalance in prices between supply and demand. There is still no universally admitted indicators to observe the reconstruction of the market.
The liquidity indicators are not always easy because of lack of essential statistical information, as well as the main drawback is their static nature. However, despite the difficulty of getting these criteria, their use can be very essential.
Article Source: FxTradingStock.com
About the Author
Before you come to the step of opening your online Forex account, please make sure that you gather as much info about the company whose service you are choosing and the service of opening Forex. Sometimes a good choice is also to open a mini Forex account and do some test trades on small money and see how it works.
by: Dmitry Vasenyov
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Word Count: 443
Date: Mon, 27 Dec 2010
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