Relation between Liquidity and Volatility? | Forex Factory

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Relation between Liquidity and Volatility?

  • #1
  • First Post: Nov 25, 2019 2:11am Nov 25, 2019 2:11am
For the Forex trading market, what is relation between Liquidity and Volatility? What is the correlation between them?

Does anyone know what are the tips for verse scenario?
  • #2
  • Nov 25, 2019 8:03am Nov 25, 2019 8:03am
Hi,
That is an interesting question to pose. I'd consider them to be different metrics:
Liquidity is the depth of a market, i.e. how big an order the market can take without materially moving price
Volatility is the breadth of a market, i.e. how far price ranges in a given time period

A low liquidity market has the capacity to be more volatile as relatively smaller orders will impact price more. That said, illiquid markets can also be extremely dull if there is no order flow to stimulate price change.
Equally, a volatile market can also be very liquid if there is a lot of action in the market at a point of disequilibrium, e.g. at the time of major news announcements.

I'd say it all depends on the actual cicumstances in a given market at any time, I wouldn't say there was an automatic linear sort of correlation between the two.
  • #3
  • Nov 25, 2019 10:27am Nov 25, 2019 10:27am
Quoting dextormason
For the Forex trading market, what is relation between Liquidity and Volatility? What is the correlation between them? Does anyone know what are the tips for verse scenario?
More Liquidity reduces Volatility and less Liquidity increases Volatility.
You mean GAMBLE???.... Thats all the market is, ONE GIANT CASINO!!!
  • #4
  • Nov 25, 2019 11:11am Nov 25, 2019 11:11am
Quoting str8v4lu3
{quote} More Liquidity reduces Volatility and less Liquidity increases Volatility.
This is the most stupid thing I have read for a while now.
  • #5
  • Nov 25, 2019 11:36am Nov 25, 2019 11:36am
Quoting Drolph
{quote} This is the most stupid thing I have read for a while now.
Volatility is the measure of how drastically a market’s prices change. A market’s liquidity has a big impact on how volatile the market’s prices are. Lower liquidity usually results in a more volatile market and cause prices to change drastically; higher liquidity usually creates a less volatile market in which prices don’t fluctuate as drastically.

https://www.forex.com/en/education/education-themes/trading-concepts/forex-liquidity-and-volatility/
You mean GAMBLE???.... Thats all the market is, ONE GIANT CASINO!!!
  • #6
  • Nov 25, 2019 2:28pm Nov 25, 2019 2:28pm
Quoting dextormason
For the Forex trading market, what is relation between Liquidity and Volatility? What is the correlation between them? Does anyone know what are the tips for verse scenario?
both are correlated. the moment they de-correlate that is when a black swan strikes

foreign exchange is volatile, because macro data of many levels affects it as currency conversion is the backbone of the global financial markets is built on.

it is also because it is the backbone of the global financial markets, that makes it extremely liquid in the grand scheme of things.
  • #7
  • Nov 25, 2019 11:06pm Nov 25, 2019 11:06pm
Hi everyone!
Quoting Drolph
{quote} This is the most stupid thing I have read for a while now.
Why did you say it is Stupidity? This is the feature or Pro\con of Forex trading market
  • #8
  • Nov 25, 2019 11:08pm Nov 25, 2019 11:08pm
Quoting Bicarus
{quote} both are correlated. the moment they de-correlate that is when a black swan strikes foreign exchange is volatile, because macro data of many levels affects it as currency conversion is the backbone of the global financial markets is built on. it is also because it is the backbone of the global financial markets, that makes it extremely liquid in the grand scheme of things.
thanks for sharing.
  • #9
  • Edited 2:36am Nov 26, 2019 2:02am | Edited 2:36am
Quoting str8v4lu3
{quote} Volatility is the measure of how drastically a market’s prices change. A market’s liquidity has a big impact on how volatile the market’s prices are. Lower liquidity usually results in a more volatile market and cause prices to change drastically; higher liquidity usually creates a less volatile market in which prices don’t fluctuate as drastically. https://www.forex.com/en/education/education-themes/trading-concepts/forex-liquidity-and-volatility/
It does not get any better, sorry.

You are making two mistakes here: first you are mixing up things. Second you are missing out important factors. But to save myself time I am going to prove you wrong by a simple example.

Lets take the most liquid currency pair also known as Fiber: EURUSD. During a whole trading day there are proven variations of liquidity based on market trading sessions. That said we have a lower liquidity in terms of ticks (which leads to volume when integrated) as sign of market activity but also to the available DOM compared to the US Session. Get yourself DOM access in case you are questioning that. On the other hand the volatility in terms of the range the price is moving on average is higher during the US session compared to the asian one. Do you see it already? That simple example proves you wrong.

What you may have in mind are very likely price changes during low liquidity times like market open, holidays, rollover or even flash crashes like the pound crash in October 2016 or the JPY crash at the beginning of this year. Here we can often see mad price changes, but they are no sign for volatility - they are mostly driven by a horrible worsening of the trading conditions! That is a totally differents story simply not displayed in most charts. Spreads that are increasing to crazy values are causing these irritating charts when only bid or ask quotes are displayed. Not to mention slippage here. Definetely nothing a trader could benefit from in any way.
  • #10
  • Last Post: Nov 26, 2019 3:08am Nov 26, 2019 3:08am
In simple words lack of both can't move price, but after extended periods of consolidation, incoming orders can move the price significant with momentum. You can see volatility as noise and liquidity like, water that flows in one direction. In fact when there is big liquidity then there is a liquidity pool (consolidation) that needs volatility (news help to break price in either direction).
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