Liquidity Definition

The concept of liquidity is commonly referred to in finance and is not exclusive to trading financial instruments. For example, a business could have liquid assets such as foreign currency or products that can be easily sold. They are considered to be easy to extract their value by selling them, and therefore liquid. Illiquid assets like property are considered to be harder to sell and extract their value. These are assets you could not count on them in an emergency.

In forex trading, a liquid market is one with a high volume of trading activity. Participants are constantly buying and selling, such as the EUR/USD currency pair. This means you can always count on finding a counterparty to buy from or sell to. This is due to very high demand and supply because there is a persistent flow of transactions.

An illiquid market could be a stock which has only a few trades per day, meaning if you held those stocks and wanted to sell them, you may be waiting hours or days to sell them. However, liquidity can depend on the time of the day or week, even for very liquid markets. Liquidity can become thin even for pairs like EUR/USD. At the end of the trading day, banks tend to stop trading and a lot of other participants also pull back causing the liquidity pool to deplete. 

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