Trading Forex During Periods of Low Liquidity: Challenges and Opportunities

14 October 2025

Forex trading in thin markets is risky and requires not only a deep understanding of financial markets but a well-tested trading strategy. Low liquidity in Forex occurs when there are fewer buyers and sellers actively participating in the market. During these times, trading volumes shrink, and it becomes more difficult to open large lot-sized trades without affecting the price movement. Low liquidity in Forex is important because it directly affects the spread, which is the main trading cost. However, together with spreads, it also impacts slippage and can often cause gaps. For an average retail trader, thin markets often mean unpredictable volatility and higher trading costs. Institutional traders also face challenges as they operate with large volume trading orders, and it becomes impossible for them to trade without causing major price movements.
This guide explains the mechanics, challenges, and opportunities of Forex trading in low liquidity periods. We will explain when low liquidity typically occurs, why it is so important, and what traders can do to not only avoid losses but also generate profits when thin markets are present.

Market structure and basics of thin markets FX trading

The Foreign exchange market is an over-the-counter (OTC) marketplace in nature. What this actually means is that there is no one single central governing authority, and the market is mostly decentralized. Trading occurs through a network of liquidity providers, also known as LPs, which are usually large banks, brokers, and electronic communication networks or ECNs. While in normal market conditions this network can provide deep liquidity with a deep order book coupled with very tiny bid-ask spreads, the situation is totally different in thin markets. To trade low liquidity markets without knowing these details means exposing yourself to several risks simultaneously. In low liquidity Forex markets, this depth of order book no longer exists, and prices can swing up and down very quickly, which is very risky.

Market depth and trading sessions

Market depth is heavily influenced by trading sessions, especially when they overlap. The most liquid sessions are in London and New York, and when they overlap, the markets become most active, characterized by deep liquidity and fast price movements. Asian sessions, on the other hand, have historically lower liquidity as they have fewer trader participants. Institutional traders rely on tools such as consolidated limit order books known as CLOBs to see available liquidity across asset classes, but even those tend to show lower volumes during quiet markets.

Last look behavior

“Last look” behavior is a key factor during low liquidity periods. It is a practice where liquidity providers can reject or even requote a trade if the market rapidly moves against them during trade execution. This can increase rejection rates when markets experience thin liquidity periods. This can make it difficult to open a trading position during thin markets and cause losses due to missing good setups. ECNs and prime brokers might display an order book that looks stable, but if real resting orders are few, a single aggressive order can cause spikes where the price can sweep multiple levels, resulting in a sudden spike or drop.

Understanding and anticipating these structural characteristics of thin markets is critical for traders who participate in thin markets FX trading. Without being aware of these details, the price will seem erratic, and technical setups will mostly be unreliable.

When and why do low liquidity situations in Forex occur

Low liquidity situations in FX markets are most common during trading hours when trading sessions are ending. For example, when the New York session ends and Tokyo opens, the liquidity is usually very low and the order books are thin. This often translates into exaggerated price movements. Liquidity also tends to dry up during holidays such as Christmas, New Year, or major regional public holidays when banks and other institutions are closed.

Common causes of liquidity problems

Session gaps like the Sunday opens are another source of thin trading market conditions. Lack of orders over the weekend means any new flow can cause large price reactions. Macro events like central bank announcements or geopolitical events can create brief periods of low liquidity as market participants reassess their risks. This is especially true when the news event is scheduled to be released and can impact markets greatly. Broker-specific factors sometimes also play a role. Some brokers rely on a limited set of LPs, and if those LPs withdraw quotes temporarily, retail traders will get wider spreads than usual or no ability to open a trade at all. Technology issues, connectivity challenges, or even a surge of news-related traffic can contribute to sudden liquidity drops, which makes it risky to trade the markets.

Recognizing these patterns early allows traders to anticipate when liquidity may be lower than usual and adjust position sizing or strategies accordingly. Lowering position sizing while increasing stop loss distances is a common effective strategy against liquidity shortages in FX markets.

Challenges of Forex trading in low liquidity

Trading the forex markets during low liquidity hours introduces a set of unique challenges that can quickly catch an unprepared trader off guard. The first and most visible issue is usually widening, making it very difficult to trade profitably on lower time frames. While high liquidity sessions offer lower spread possibilities on major pairs, thin markets may widen to several pips, which greatly increases transaction costs and lowers profitability significantly. Imagine having a scalping strategy on a 5-minute timeframe only to see spreads reaching 2-3 pips, quickly hitting the stop loss, while the price continues in your direction. Even if you could close the trade profitably, trading costs would evaporate those profits quickly. This is especially true on major pairs where common movies include 2-4 pip price swings, making it near impossible to profit when spreads go beyond 1 pip. Surely, if you trade on an hourly timeframe or beyond, this is less of an issue, but for scalpers, lower spreads are life-changing.

Slippage and partial fills

Low liquidity FX trading is risky because of slippages as well. Slippage is a common problem as orders that appear executable at a certain price may fill several pips away, especially when market orders are used. Market orders are order types that are filled immediately at the best available price. Scalpers and high-frequency traders will lose money if even a small amount of slippage occurs, as it can completely wipe out expected profits. Partial fills are also a noticeable threat, especially for larger trading orders. In low liquidity conditions, the order book might not have enough orders resting at the quoted price, which usually leads to either a split fill at multiple prices or a completely rejected trade.

Gaps

Gap risks are also elevated during low liquidity in Forex. Because of fewer participants, the liquidity is lower, and a news headline or a sudden inflow or outflow of money can cause the price to gap up or down without trading through intermediate levels. Imagine having a stop-loss at 1.1010 on EUR/USD for the price to suddenly move past the level and go to 1.1009, which means larger losses. Traders holding positions through these periods of thin markets can experience serious profits or losses without the ability to manage the position in real time.

Technical indicators become less reliable when liquidity falls. For example, a moving average or oscillator can often generate false signals due to erratic price spikes, which cause a serious impact on indicator readings. Volume-based indicators also tend to become misleading because volume drops dramatically than usual and forces the indicators to become very unreliable.

Order rejection rates increase as liquidity providers are more cautious not to make mistakes. This usually leads to trader frustration in low liquidity hours, and they need to tighten risk controls, be much more patient than usual, and use a different set of rules specifically designed for low liquidity conditions.

Edge when you trade low liquidity markets

Despite many challenges, there are distinct opportunities for traders willing to trade low liquidity markets. Since low-liquidity markets often produce exaggerated price movements, mean-reversion setups are presented very often. When price spikes due to a single large order, seasoned traders can fade the move if they have confidence in the underlying trend. Mean-reversion strategy is a popular method, and it requires certain conditions to work profitably, one of which is low liquidity markets. Traders usually wait for a large spike and then follow the price on a pullback to the mean price.

Another opportunity lies in predictable session patterns. Many traders exploit the moment when prices drift in tight ranges during the Asian session or around holidays, allowing for range-trading strategies with well-defined risks.

Advanced methods

Forex trading in thin markets can be implemented with advanced strategies as well. Microstructure arbitrage is one of the methods. For example, price dislocations between ECNs or between spot and futures markets can occur when liquidity is low. Traders with fast execution trading systems like HFT (high-frequency trading) can profit from these inefficiencies, but the competition is high, and the costs for developing such complicated trading systems are very high. However, large hedge funds and AI arbitrage companies use these techniques to generate consistent profits in thin markets. A volatility premium also exists in these markets. Option sellers can collect higher premiums when implied volatility is increased because of scarce liquidity in the markets. Structured breakout trading can also be effective if it includes filters for low liquidity, such as waiting for a certain number of ticks to confirm continuation before betting.

Strategy-wise, longer timeframe trends work better in low liquidity environments because they effectively filter out intraday noise. Limit-order techniques are especially valuable here by using pending orders instead of chasing price with market orders. This way, traders can control execution costs and take advantage of temporary order block imbalances.

Risk controls

Caution is key when you try to trade low liquidity situations in Forex. Just because opportunities exist does not mean every setup is promising. Traders must back-test their strategies and compare win rate and risk-reward ratios. Adjusting position sizing to reflect low liquidity is essential, and they should step aside and avoid trading when the price starts to move too erratically.

Best tactics and order types for low liquidity FX trading

Proper execution is everything in low liquidity FX trading. The first principle is to limit orders over market orders whenever possible. It is best to adjust strategies and specifically design them for these moments to avoid gaps and slippages as much as possible. Limit orders give traders superior control over entry prices and help them avoid slippages. However, there is a risk of missing fills.

For larger orders, traders often use time-weighted average price (TAWP) or VWAP (Volume-weighted average price) indicators to break trades into smaller sizes and reduce market impact. This is true for large institutional traders and not for retail traders. Traders do not expect the same fill quality as during liquid markets, and by taking into account the potential slippage, traders can adjust stop-loss levels and profit targets accordingly.

Liquidity filters

Traders can also filter when to enter depending on the volatility. Some traders can use order books to monitor liquidity and ensure that at least some participants are present in the market before opening orders. Another wise technique is to avoid opening orders right before a major macroeconomic news release like Non-farm, interest rates, or inflation. This is to avoid wider spreads and volatile price spikes.

Account choices matter as well, and STP and ECN accounts provide more transparent pricing supported by interbank liquidity, where market makers widen spreads aggressively during low liquidity periods.

Risk management for thin markets FX trading

Risk management becomes critical when trading forex in low liquidity hours. The first step is to adjust position size and use lower lot sizes than usual to account for higher volatility and trade execution uncertainty. Even if slippage or gaps occur, a smaller lot size ensures you can take a hit due to wider stop-loss placement. Extremely tight stops can usually be triggered by minor price fluctuations, which can easily lead to repeated losses. By placing wider stops beyond obvious liquidity pools or recent swing highs/lows, traders can protect themselves from sudden price jumps.

Clear protocols

Forex trading in thin markets can only be successful if the trader has a clear set of rules, a protocol to follow. They must have a plan to execute their strategy flawlessly and swiftly, as even seconds might matter when liquidity is low and the price starts to rally or drop. Seasoned traders might also employ advanced hedging strategies like buying options or taking offsetting positions in correlated pairs. However, beginners should always try to focus on just one market to avoid information overload in the beginning.

Another integral part of risk management is to use a risk per trade approach and ensure it is no more than 0.5-1% of the trading account. This way, even consecutive losses won’t cause a major drawdown, which is crucial to survive in the long run.