Liquidity is the ability of an asset to be quickly converted into cash without significantly affecting its price. In financial markets, liquidity refers to how easily an asset (such as stocks or currencies) can be bought or sold without large price fluctuations.

High liquidity markets – such as Forex or large stocks – are characterized by small spreads between bid and ask, and quick order execution. On the other hand, low liquidity markets may lead to difficulties in buying or selling large quantities without moving the price.

Understanding liquidity is important for traders to reduce slippage and improve the chances of entering and exiting positions efficiently.