Liquidity

Liquidity is how easily an asset can be bought or sold quickly without moving the price much. In SMC the word also means zones where stops cluster.

How it works

A liquid market has many buyers and sellers, a tight spread (the gap between the best buy and sell price) and a deep order book. A large trade there barely moves the price. In an illiquid market even a mid-sized order eats through the book and you get a worse price, which is called slippage.

Liquidity changes over time. Large coins like BTC and ETH have plenty, while small altcoins can be very thin. In forex it peaks when London and New York are both open and drops at night, on weekends and on holidays.

In Smart Money Concepts trading, "liquidity" also means places with lots of stop-losses and pending orders: above highs and below lows. The price is often drawn to these zones because a big volume can be filled there.

Example with numbers 1

You sell $20,000 of a small token. The book shows only $5,000 of buy orders near the price, and they thin out further down. Your order eats several levels, and your average sale price ends up 4% below the price on screen.

Example with numbers 2

The same amount of BTC on a large venue fills with almost no price change, because the book holds millions of dollars in orders near the price.

Common mistake

Beginners look only at the chart and the price and never check whether they can actually exit. Small coins can rally on thin liquidity: getting in is easy, but you cannot sell at the chart price. Before a trade check the trading volume, the spread and the depth of the book, and in illiquid assets use limit orders and a smaller size.

Questions and answers

What is liquidity in simple terms?

It is the ability to turn an asset into cash quickly at a fair price. The more buyers and sellers, the higher the liquidity.

How can you tell a coin has low liquidity?

Signs include small daily volume, a wide spread, sparse orders in the book and sharp price jumps from small trades.

What does "price goes for liquidity" mean?

It is an SMC phrase: price is drawn to zones above highs and below lows where stops cluster, because big players can fill large orders there more easily. It is a model, not a guarantee.

Liquidity

How it works

Questions and answers

Related terms

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