Liquidity
Liquidity is how easily you can buy or sell without materially moving price. High liquidity usually means tight spreads and deep order books.
Definition
Liquidity describes how easily you can trade size without paying large costs. In practice, liquidity reflects both the tightness of the spread and the depth available in the order book.
Common liquidity signals
• Tight bid ask spread.
• Strong market depth near the current price.
• Low realized costs, such as low effective spread.
Why it matters
Low liquidity makes trading expensive and unpredictable. Thin liquidity increases the chance of slippage, worse fills, and larger effective spreads.
Common pitfalls
Confusing volume with liquidity: A market can have some trading activity but still have wide spreads and low depth.
Ignoring time of day: Liquidity often varies by time and by proximity to major news events.