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Market liquidity

A introduction to market liquidity and its importance.

The Amega Geek avatar
Written by The Amega Geek
Updated over a week ago

Perhaps the most important factor determining any tradable asset's strength in the online market is market liquidity.

What is market liquidity?

Market liquidity describes the ease with which an asset can be bought or sold quickly and at a stable price.

In simplest terms, it is how fast you can exchange an asset for cash.

Market liquidity depends on many factors, such as the number of active traders completing orders for an asset and the amount of supply and demand for the asset.

High trading activity, as well as high levels of both supply and demand, usually determine a high market liquidity.

Why is market liquidity important?

Market liquidity is important for many reasons. Perhaps most significant is the fact that it impacts how fast you can open or close a position.

Since high liquidity means a large number of people buying or selling at the same time, it is generally associated with less risk, as there is always someone on the opposite side of the trade.

Furthermore, it determines the spread that a company can offer, increasing the probability of tighter spreads.

Which are the most liquid markets?

  1. Forex (currency pairs)

  2. Large-cap stocks

  3. Commodities


Liquidity should be considered before every trade. A lack of liquidity is often associated with higher risk.

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