Editorial staff
Different trading sessions and hours have different liquidity. Some markets are highly liquid, while others have low liquidity, meaning the number of market participants is very low. Trading during low liquidity is a different beast than trading when there is always a willing buyer or seller.
Below is the practical guide to understanding low-liquidity market conditions, hidden risks, and the smart trading strategies traders can use to protect their capital with clear explanations.
What is low liquidity?
In financial trading, low liquidity refers to how easily you can enter or exit a position without causing large price changes. When markets are liquid, trades fill quickly, spreads stay mostly low, and price moves smoothly. But when markets lack liquidity, even moderate orders can push prices around, and this is why low liquidity trading catches many beginner traders off guard. Low liquidity causes several challenges, including increased slippages, wider spreads, gaps, and makes stop-loss orders less reliable. Slippages and gaps happen because there is not enough liquidity for the market to fill you at your intended price, and gaps can cause prices to move past your stops. Add wider spreads to all these, and you have a basket of challenges that require superior discipline and understanding of thin markets trading.
Liquidity typically dries up during off-session hours, the silent period before high-impact news, global holidays, and sudden episodes when large players step back. It is crucial to distinguish low volume from low liquidity. While the two often overlap, the lack of available orders is far more dangerous for traders than low liquidity price moves.
Why traders must respect low liquidity
Low liquidity is crucial for traders because it can damage profitability and cause unnecessary drawdowns. It all depends on the trader’s strategy and approach. Wider spreads and slippages make certain strategies useless, and traders must know when low liquidity hours occur to avoid getting stopped out by market noise.
Why liquidity drops
When there are fewer resting orders in the book, the price jumps to the next available level. This creates small gaps even within a single candle. A good example would be NZD (New Zealand Dollar) pairs during early Asian sessions. These pairs can move 10-20 pips instantly because the order book is too shallow to support smooth price movement.
Wider spreads, Broker adjustments
Market makers and brokers protect themselves by making spreads wider when liquidity runs low. A pair that normally has a 1 pip spread can show 4-6 pip spreads during holiday hours. Paying more to enter positions is never a pleasant experience. When spreads widen, they can also easily trigger stop loss orders, making it important to use wider stops.
Slippage and poor fills
During low liquidity, market orders often fill at worse prices, and stop-loss orders intended to close at 1.2150 might get executed at 1.2140, because there were no available orders in between. This problem becomes more common in exotic pairs and outside active trading sessions.
Fakeouts and algorithmic whipsaws
Algos run modern financial markets, and they thrive in thin markets because small orders can create deceptive price action movements. A quick push above a resistance level might look like a breakout, only to reverse instantly once liquidity normalizes. Just before London opens, small liquidity grabs are a common occurrence, causing 5-10 pip spikes that can trick many traders into jumping in too early.
Emotional trading and overreaction
Low-liquidity moves frequently look dramatic despite being meaningless. Sudden bearish or bullish candles can appear to signal trend reversal, only to vanish once liquidity returns. Beginners often overreact, entering too early or chasing moves that have no real momentum behind them. Range markets and choppy markets are common occurrences during low liquidity hours, meaning whipsaws are common. Traders can enter a buy trade where they are stopped out after an opposite price spike, and when they enter a sell trade, they still lose due to the price moving in a range.
Practical tips for traders
The main idea is to recognize when markets tend to offer low liquidity scenarios. Asian sessions for most major pairs have lower liquidity. Holiday weeks and major holidays also tend to make it difficult to find highly liquid markets. Early Monday and late Friday also have low liquidity, and pre-news moments are also risky.
To counter these, traders must adapt their strategies. Reduce position size and use wider stop losses to counter unpredictable movements and wider spreads. Best setups are usually range-based trading setups instead of breakout strategies, as fakeouts are frequent. Another important step is to wait for the confirmation and only pick high-quality setups. All these must be coupled with disciplined and strict risk management rules. Traders must account for slippages in their strategy. It is possible to set maximum slippage tolerance whenever the platform allows. Not chasing sudden price spikes is a good idea as well.
Editorial staff
