What is liquidity risk in forex trading?

Liquidity risk in forex trading refers to the possibility of being unable to buy or sell a currency pair without significantly affecting its exchange rate. In markets with low liquidity, large trades may lead to substantial price movements, resulting in increased costs for traders. This risk is particularly relevant during periods of high volatility, economic events, or when trading less popular currency pairs. Generally, major currency pairs like EUR/USD or USD/JPY exhibit higher liquidity than exotic pairs. Traders should be aware of market conditions and select currency pairs that suit their liquidity levels to mitigate potential risks.