In plain English
What Liquidity means
A market is liquid when orders can be executed without moving the price very much. Liquidity depends on how much size is resting in the market, how many participants are active, and how close bids and asks are to each other. It is not a fixed number.
Why it matters
Liquidity affects spreads, slippage, fill probability, and the chance of partial fills. Thin liquidity can make execution more expensive and less predictable, especially for large orders or during news releases and off-hours trading.
Example
If a currency pair has many bids and offers near the current price, a 1-lot market order may fill immediately with little price impact. If only a small amount is available at each level, the same order can move through several prices before it completes.
Quick answers
Common questions
Is liquidity the same as trading volume?+
No. Volume measures how much has traded. Liquidity describes how easily new orders can be executed without substantial price impact.
Can a market be liquid and still volatile?+
Yes. Liquidity and volatility are related but different. A market can trade actively and still make large price moves.
Sources