The Acid Test ratio, also known as the Quick Ratio, is a measure of liquidity used to measure a business’s ability to pay its current obligations without the use of inventory or other current assets. It is used in forex trading to measure the level of risk inherent in a particular currency pair. In essence, the Acid Test Ratio reveals how much capital a trader would need in order to purchase a specific currency in order to cover any losses incurred should the price of that currency move against the trader.
The Acid Test ratio is determined by taking the total of a trader’s liquid assets, such as cash, equivalents, accounts receivable, and short-term investments, and dividing it by the total of the person’s current liabilities. A higher ratio indicates more financial strength, while a lower ratio reveals higher risk. Ultimately, the Acid Test creates a snapshot of a trader’s ability to quickly meet their financial obligations.
. When evaluating a currency pair for trading, it is important to take into account the Acid Test ratio to determine how much risk is being assumed and if entering the trade is worth the effort.