Liquidity
Also called: liquidity, market depth, depth, thin market, illiquid.
How it is read
Liquidity is usually read through two things at once: the bid-ask spread, and the resting depth. Either one alone is misleading. A tight spread over very little size is not depth. Visible size that vanishes the moment it is hit was never really there. Liquidity also varies through the session. It varies across the instrument set too. Index contracts near the money at a near expiry generally trade far more easily. Distant strikes, far expiries and smaller names trade less easily. Historic traded volume describes what happened earlier. It does not describe what can be traded now.
What it does not tell you
Liquidity guarantees nothing about price direction. It also does not survive stress. Depth can thin sharply around an event. It can thin in a fast move too. That is exactly when an exit is most wanted. A last traded price is not an executable quote. So any sum that assumes a fill at a screen price overstates the result. A thin book would not have delivered it. That applies to a paper record, an assumed exit level and a backtest alike. Liquidity is also not a fixed cost that can be looked up in advance.
See it in an experiment
Market X-Ray: Bid/Ask and Slippage — Walk an example order through bid/ask levels and inspect spread, partial fills and slippage.
Related concepts
Market, Limit and Stop Orders: What Each One Controls
A market order takes what is available, a limit order sets a boundary, a stop order starts a second order. What each one controls, and what none of them promises.
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