What is Liquidity?
The capital available to transact at each price level — the substrate of every move.
Definition
Liquidity is the depth of resting orders + the marginal capital willing to fill aggressive flow at each price tier. It is *not* volume — high volume on thin liquidity means many small trades chasing the same shrinking pool. Liquidity is asymmetric (often deeper on one side), regime-dependent (Asian session is thinner than London open), and venue-specific (CME gold ≠ COMEX gold ≠ XAU/USD spot).
Why it matters for trading
- Slippage is a function of liquidity, not volume. A market order during the London/New York overlap costs ~0.1 pip on EUR/USD; the same order at 22:00 UTC costs 1-3 pips.
- Liquidity gaps are where stop-runs happen. If buy-side liquidity is thin between 1.0850 and 1.0820, a sell sweep cascades through the gap to find the next bid — that is a liquidity grab, not a "breakdown".
- Strategies that work in deep liquidity (mean-reversion against walls) fail in thin liquidity (the wall walks away from you).