Ask Leo : What is Liquidity in Trading?
Liquidity is an available and visible concept in any type of market, this term refers to the ability of it to buy or sell the assets that are traded there.
Whenever we interact with a market, whatever it is important to determine the level of liquidity that it has, studying this small part will allow us to determine how complicated we will have to buy or sell the asset, basically how complicated it will be to trade with it.
It is always preferably to trade with markets that have high levels of liquidity, give much more security and guarantee that you will not lose your funds, or that in case of wanting to leave them quickly you can do it without any problem (and without suffering great losses.)
A market a good level of liquidity is a market where you can buy or sell any asset of a certain market without altering the price too much. The BTC/USDT par is a great example of a market with enough liquidity, in this market any normal merchant can buy BTC for USDT or USDT by BTC without altering the price too much. This makes the liquid market.
An example of a high liquidity market is Bitcoin/USDT, you can buy and sell in this market easily and quickly. Bitcoin is one of the most difficult coins to manipulate today, the king currency and with the highest market capitalization that exists.
A market with little liquidity is for example the market of any common shitcoin, as we know shitcoins are coins that have very little market capitalization, therefore any price movement can shoot the market enough or give it down, making it extremely volatile and difficult to trade.
This brings all kinds of risks, as there is little market capitalization, the supply of the asset will be high, the little demand, imagine that you have the market with 100 USDT to acquire 1000 shitcoins of the other asset, you can buy these shitcoins for the USDT easily, but It will cost you to get out of those 1000 shitcoins in the future, at least without suffering losses, with this I mean that you must lower the price at which you offer the shitcoin quite a lot, with respect to the real amount to which it cost at that time. (To be able to sell it easily.)
Based on the explained we can conclude that the importance of a liquid market lies in how easy it will be to trade in that market, understanding this we can play a little with the markets and add certain aspects to our trade strategies, for example, we can follow projects Interesting that have little liquidity and based on the growth of this establishing some purchase order.
This is because movements that are not relatively very large in markets with little liquidity manage excessive growth and then sell the asset with some profit. While this seems like a pumping and downwards movement is common and that eventually helps small markets.
If you want security to buy and sell an asset you should easily look for markets with high liquidity, where continuous price movements do not move the same too much.
If you want to speculate and buy the best thing for you, it could be interact with markets with little liquidity, if you are insightful enough you can take very high profits in the instability of these markets.
Posted Using LeoFinance Beta