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Liquidity definition
Liquidity is how easily an instrument can be bought or sold without moving its price much. A liquid market has many buyers and sellers, tight bid-ask spreads, and steady execution.
High liquidity is normal in major forex pairs, large-cap shares, major indices, and actively traded commodities. Low liquidity widens spreads and sharpens price moves, because fewer orders sit at each price.
Liquidity is not the same as volatility: liquidity is how easily you can trade, while volatility is how far the price swings. Liquidity can also describe price zones where many orders rest, such as above prior highs or below prior lows, where stop and breakout orders can trigger short bursts of movement.
Liquidity Example
EUR/USD is a highly liquid forex pair.
You place a market order during the London and New York overlap, when activity is high.
The order fills close to the quoted price, because plenty of buyers and sellers are present, so slippage risk stays low.
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