Market liquidity: why it determines the cost of a trade

Market liquidity describes how quickly and how cheaply you can buy or sell an asset without moving its price. A liquid market has many participants, a tight spread and plenty of offers in the order book, the list of buy and sell orders. A thin market works the other way: even a small order can noticeably change the price.

Liquidity changes over time: it can be lower at night, on weekends or during sudden events, and there are large differences between trading pairs. A lack of it raises costs (spread, slippage) and makes it harder to exit a position at your chosen price. Do not confuse it with volume, because heavy turnover does not always mean a deep market. In the ICT/SMC method (Inner Circle Trader / Smart Money Concepts), the word “liquidity” means something different.