Liquidity
Liquidity is the ability to quickly buy or sell an asset at the current market price without significantly affecting that price.
High liquidity — easy to execute a trade. Low liquidity — trade is difficult or will execute at an unfavorable price.
High Liquidity
Signs:
Narrow spread
Many orders in the order book
Large trading volumes
Fast order execution
Advantages:
Quick buy/sell
Price close to market
Minimal slippage
Easy to enter and exit
Low Liquidity
Signs:
Wide spread
Few orders in the order book
Small volumes
Slow execution
Problems:
Difficult to find a counterparty
Execution at worse price
High slippage
Your trade affects the market
How to Assess Liquidity
By spread:
Narrow spread = high liquidity
Wide spread = low liquidity
By order book depth:
Many orders = high liquidity
Few orders = low liquidity
By trading volumes:
High volumes = high liquidity
Low volumes = low liquidity
When Liquidity Changes
Trading time:
Active hours — liquidity is maximum, spreads are narrow
Night, weekends — liquidity drops, spreads widen
News:
Before news — participants exit, liquidity drops
After news — participants return
Volatility:
High volatility — liquidity may decrease
Low volatility — stable liquidity
How to Trade Considering Liquidity
On Highly Liquid Assets
Any strategies suitable
Scalping works well
Can trade large volumes
Suitable for beginners
On Low Liquidity Assets
Recommendations:
Trade smaller volumes
Use limit orders
Increase stop-loss
Avoid scalping
Pre-entry check:
Current spread — narrow or wide?
Order book depth — many orders?
Trading volumes — actively traded?
Time of day — active hours?
Liquidity and Slippage
Slippage — difference between expected execution price and actual price.
High liquidity → low slippage
Many orders at levels, execution at expected price.
Low liquidity → high slippage
Few orders at levels, order "slips" to next levels, average price worse than expected.
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