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Liquidity


Liquidity is a measure of several features of a particular asset’s order book within a given market. Liquidity is an indicator of how much of a market impact a large order will have on the price of an asset. An asset with more liquidity has deeper order book depth. This means that it will be able to absorb more orders with smaller price movements.

Assets with lower liquidity will have more price movements from big orders, resulting in slippage for traders. A trader could space their order out over a longer period of time to mitigate this effect, but this adds risk because the asset’s price may move.

An asset’s volume is highly correlated with its liquidity. The liquidity to buy and the liquidity to sell will not be exactly the same, but they are normally very similar.