<Last updated 25.04.2020>
Hi! If you are interested in online trading you should read the below that provides an important explanation about volatility and risk in the market for CFDs.
Volatility, Liquidity and Risk in the Forex Market
> We call Volume/Quantity the amount traded when a transaction (Buy or Sell) takes place. Most of the trading volume comes from traders that buy and sell based on intraday price movements.
Liquidity is the amount of buying and selling volume happening at any given time. Volume traded in the Forex market is extremely high, thus there is much liquidity and prices update continuously each second since a huge number of transactions are happening continuously. Under normal market conditions, with you can instantaneously buy and sell as there will most probably be someone in the market willing to take the other side of your trade
In this kind of High Liquidity Environment, we have relatively small price changes while in an Illiquid environment we have big and sometimes huge price changes. Liquidity is very important because it determines how easily price can change over a given time period.
When prices change greatly, in a relatively small period of time, then we experience High Volatility in prices so we have Volatile Market Conditions. In such market conditions, the risk is higher for traders because the big changes happening in prices lead to higher profits but also lead to higher losses in a short period of time. When buying an asset at a certain price, and we experience a sharp and big drop in prices, then we experience high losses in a short period of time.
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