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What is liquidity risk in forex trading?

Liquidity risk arises when traders cannot execute trades at expected prices due to lack of counterparties. While major pairs like EUR/USD have deep liquidity, exotic pairs may suffer from wider spreads and slippage. Liquidity also drops during off-hours or major shocks, making order execution unreliable. For example, during flash crashes, stop-losses may trigger far below intended levels. Retail traders face liquidity risk when using brokers with limited liquidity providers. Professionals mitigate it by trading liquid pairs, using limit orders, and diversifying across venues. Liquidity risk is less visible than market risk but equally damaging when ignored.