For Business

Market Basics

What Is Liquidity

Liquidity is how many buyers and sellers are ready to trade with you at this moment, and it decides how far the price moves when you act. This paper shows you what a full market and a thin one look like, when in the day the room fills and empties, and how to read liquidity on your own screen from three signs: the spread, the tick count under the chart, and the hour.

Difficulty
Beginner
Reading time
6 min
Pages
7
Reviewed by
Saman Rahbar

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The shelf

Liquidity is how much is on the shelf right now: how many people are ready to sell to you at this price, and how many are ready to buy from you. Picture two shops selling the same thing at the same price. In the first, the shelf is full; your purchase takes one item and the price stays where it was. In the second, there is one item at each price; you take the first, the next one costs a pip more, and you moved the price yourself just by buying. Both shops are open. Only one of them is liquid.

When the room fills and empties

The shelf is not the same all day. The currency market is open all week, but the crowd in it comes and goes with the clock. It fills when London opens and is at its fullest in the afternoon, when London and New York are both trading. It thins through the American evening, and it is at its emptiest around the broker's midnight, when the day's books are rolled over. The same order that fills at one price at five in the afternoon can climb the shelf at midnight, because the sellers have gone home.

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