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Foreign Exchange: The Complete Deal by James Sharpe

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11. Liquidity

The definition of ‘liquidity’ is when currency can be bought or sold quickly (or within an expected period of time) with minimal loss of price (minimal price effects) and at any time within market hours. Liquidity relates to the certainty of price and time. Therefore, we can view liquidity risk as the degree to which we are surprised by the value and time outcome. The key element of a liquid market is that there is a large pool of buyers and sellers at all times. The importance of understanding liquidity cannot be overstated. This analysis is transferable to any asset.

Liquidity has always been a talking point amongst traders. The focus is very rarely on liquid markets but rather on illiquid trading conditions. The latter are ...

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