Why is trading liquidity so important?

Liquidity is the foundation of a healthy, efficient, and stable market, and it has a profound impact on traders and the market as a whole:

1. **Trading execution efficiency and cost:**

* **High liquidity:** Ensures that your trades (whether buying or selling) can be executed quickly and at prices close to your expectations, reducing **slippage** (the difference between the actual execution price and the expected price). Trading costs (including spreads) are lower.

* **Low liquidity:** Large slippage is likely to occur, trading costs are higher, and it may even be impossible to complete trades at expected prices.

2. **Price discovery and stability:**

* **High liquidity:** The market has a large amount of trading activity, and the competition between buyers and sellers is more robust, helping to form a more fair and accurate market price that reflects the fair value of the asset. Price fluctuations are relatively stable.

* **Low liquidity:** Even small trades can lead to severe price fluctuations, price discovery efficiency is low, and it is easy to be manipulated by large players.

3. **Market attractiveness:**

* **High liquidity:** Attracts more traders and investors to participate, as they know they can enter and exit the market at any time, reducing investment risks and uncertainties. This, in turn, further enhances liquidity, creating a virtuous cycle.