In the Forex markets, high liquidity means that there are many buyers and sellers. Higher liquidity also means the execution speeds for trading orders are lightning-fast. Forex is the most liquid market and has the lowest spreads and commissions because of high liquidity. 

Being able to enter and exit markets fast can have many benefits. The most obvious one is to get the best price and reduce slippage and spreads. A large number of buyers and sellers leads to lower spreads which is super beneficial for FX traders as there is always someone waiting at each price.

Lower trading costs allow traders to implement extremely shorter-term strategies. It would be impossible to scalp markets for tiny profits without high liquidity. Liquid markets are also very efficient and let traders execute trading strategies faster. 

There are two types of liquidity every trader must know: market liquidity and funding liquidity. Market liquidity is most important for retail traders as they have lower trading capital. 

Market liquidity

Market liquidity simply means the ease with which an asset, such as a stock or FX pair can be bought or sold in the open market without affecting its price significantly. The faster the asset can be traded, the more liquid it is. 

When there are fewer market participants, the liquidity is lower and each large trade can cause price fluctuations, which is never a good thing for retail traders. 

Funding liquidity

The funding liquidity definition is simple. It refers to the company's or entity’s ability to meet its short-term financial obligations and access necessary funds to cover its debts. Because of this, funding liquidity is an entirely different concept and not important for retail Forex traders. 

If you have traded Forex or any other financial markets you would have noticed how sometimes price is just moving sideways without much volatility. Lower market activity usually happens during Fridays and before news when traders either close out their positions or await important news to be released. 

Support and demand dynamics can also affect liquidity. Assets with low demand usually have lower trading volumes and decreased liquidity. This is why exotic pairs usually have higher spreads as their liquidity is often extremely low.

Market participants can also affect liquidity. When large institutional traders place their orders liquidity increases and vice versa. Forex major pairs such as EURUSD, GBPUSD, USDJPY, and USDCHF are usually the most liquid pairs as large institutions and corporations tend to trade these currency pairs. 

The first thing to do is to avoid trading during low-volatility market hours. These hours are usually late-night sessions, Asian sessions, and Friday late-night hours. During these hours, the trading volume decreases leading to lower liquidity. Spreads and slippage also tend to become higher. High spreads lead to lower profits potential and movements are usually so tiny it becomes very difficult to make money. 

Avoiding trading during major news events is also a good idea as liquidity becomes more volatile resulting in large price fluctuations and larger spreads. 

So, targeting market hours when liquidity is relatively high is the perfect way to make profits and avoid paying higher costs.