Liquidity in trading refers to how easily and quickly an asset (like a stock, cryptocurrency, or currency pair) can be bought or sold in the market without significantly affecting its price.
🔑 Key Points About Liquidity:
High Liquidity means:
Many buyers and sellers are active.
Tight bid-ask spreads.
Large trade sizes can be executed quickly with little price slippage.
Prices are more stable.
Low Liquidity means:
Fewer buyers and sellers.
Wide bid-ask spreads.
Difficult to execute large orders without impacting the price.
Prices can move sharply with relatively small trades.
📉 How Liquidity Affects Price Execution:
1. Slippage:
If liquidity is low, your order might not get filled at the expected price.
For example, you place a buy order at $100, but the nearest seller is only willing to sell at $102 — you "slip" by $2.
2. Order Fill Speed:
In high liquidity markets, orders are filled almost instantly.
In low liquidity markets, partial fills or delays may happen, especially for large orders.
3. Volatility and Stability:
High liquidity makes prices more stable.
Low liquidity can cause large price swings from even small trades.
4. Bid-Ask Spread:
In liquid markets, the difference between what buyers want to pay (bid) and what sellers want to receive (ask) is small.
In illiquid markets, the spread widens — increasing your effective trading cost.
🧠 Example:
High Liquidity Example: BTC/USDT on Binance — You can buy/sell large amounts with tiny slippage.
Low Liquidity Example: A new altcoin on a small exchange — Even a $500 order might move the price significantly.