Q. What’s the difference between volume and liquidity by Jamie Coleman

A. To the average trader, volume is not a very big deal. It is important from a technical perspective when it is quantifiable (sadly, it is not, in forex…). What matters most to traders is liquidity.

Markets can have lots of volume but very little liquidity. Liquid markets are those where there are bids and offers at almost every price. For example, if the market is 1.3718/20 and is going up, that means once the 20 offers have been lifted, there are 21,22 and 23 offers above it.

In a high volume market, there may be a large player who absorbs all the offers at 1.3720 but there are no offers available until 1.3735.  In those sorts of markets, prices gap and traders get whipsawed.

These are simplistic examples, but hopefully it helps illustrate the point.

For the average trader, we love liquid markets when we are wrong, so we can get out. We love illiquid markets when we have it right because the market tends to move quickly in our favor…

Source: Jamie Coleman

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