Liquidity

Definition

Liquidity describes how easily you can trade without pushing price away from a reference like mid price. Liquidity is visible in the order book as depth and quote stability.

Why it matters

Low liquidity often means wider bid ask spread and larger slippage. That makes implied probabilities less reliable and raises practical break even thresholds.

Common pitfalls

Assuming volume equals liquidity: Volume can be concentrated in a few trades.

Ignoring time of day: Liquidity changes across sessions and news events.