Liquidity
Liquidity is how easily an asset can be bought or sold without moving its price. Liquid markets have tight spreads and deep order books.
How Liquidity is calculated
No single number. Common measures are the bid-ask spread in percent, the amount resting in the book near the best prices (depth), and the average daily traded value. A rule of thumb for sizing is to keep an order to a small fraction of the average volume.
How it is read
Liquidity changes through the day and from asset to asset. It falls in a stressed market, which is when it is needed most. Large caps and major coins are usually liquid at midday and thin overnight, while small or new assets can be thin at any time, so the same order size can cost very different amounts.
Common mistakes
- Testing a rule on a thin asset using prices you could not have traded at.
- Assuming the volume you see is the volume you can trade.
- Ignoring liquidity at the exit as well as the entry.
What Tickfloor tested
Tickfloor has not published a backtest of a rule built only on Liquidity. It describes or manages something rather than giving a signal, so there is no strategy to score. It still shapes how any tested rule should be read.
Lessons that cover it
Related concepts
General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.