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What are the risks of trading during periods of low liquidity?

Liquidity is defined by how quickly an asset can be bought or sold without the price changing and depends directly on the volume of trades and quantity of market participants. When there is a lack of requests from market participants (buyers and sellers), liquidity is said to be low, negatively affecting order fulfillment since it is often accompanied by a widening of the spread. Low liquidity can be observed:

  1. When macroeconomic news comes out. The most significant of this type of news is said to be that which concerns: changes by central banks to interest rates; information on inflation levels; business activity indices; Gross Domestic Product; and announcements by the central banks in England, Japan, Switzerland and the US Federal Reserve.
  2. During the rollover period (23:55 - 00:05 ЕЕТ) when large banks and ECN systems cease to provide quotes and take a short break, taking with them their orders from the system.
  3. Before and during a time of reduced activity on a specific asset at a certain time on a particular trading session. This is down to the variation of market behavior during different currency trading sessions. For example, the yen is traded most during the Asian session and the euro during the European session, etc.
  4. At market opening on Monday and market close on Friday when the amount of market participants is low.

Trading during any of the times or events indicated above could lead to unwanted consequences and losses. Due to pending orders and IF Done orders being fulfilled at the requested price, or at one of the available prices reached by the market, the orders may be fulfilled with a market slip if the price changes at the precise moment when the order is fulfilled.

In some circumstances, non-market quotes can be given during periods of low liquidity.

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