What is an illiquid market?
An illiquid market in forex trading refers to a situation where there is a lack of buyers and sellers, leading to limited trading activity and low trading volumes. This can occur due to various reasons such as low market participation, economic events, or regulatory changes.
In an illiquid market, it becomes difficult to execute trades at desired prices, and spreads may widen significantly. Traders may also experience increased slippage, where their orders are filled at prices different from their intended levels. Overall, an illiquid market poses challenges for traders as it reduces liquidity and increases the risk of market volatility.
Example of an illiquid market?
An example of an illiquid market in forex trading is the exotic currency pairs market. These currency pairs are not as widely traded as the major currency pairs, and as a result, have lower liquidity levels.
This means that it may be difficult to find buyers and sellers at the desired prices, and there may be wider bid-ask spreads. As a result, traders may face difficulties when trying to enter or exit positions in these currency pairs.