CFD explainer: How liquidity affects your trading
Liquidity. It may be one of the most crucial factors in trading. In essence, it is the volume available at the quoted price which dictates the ease with which a trader can get in and out of a position, and without having to move down the order book to achieve a fill at the next best price.
How does market liquidity affect your trading?
From a market perspective poor liquidity is typically a function of rapidly shifting conditions, uncertainty and other macro-related issues. In illiquid periods, large orders by big money participants can exacerbate movements in price which affects the trading conditions for everyone.
From the perspective of a trader, liquidity determines how easily you can get your order filled at the displayed price. Some brokers will display incredibly tight spreads but when you hit the buy price your actual fill may be slightly different, as the volume they provide to buy at that price is very small, so they fill the balance of the order at the next available price.
This is called ‘price slippage.’ Slippage is often observed in cases of brokers not offering adequate liquidity or in an illiquid market.
Here’s how it works
Jennifer wants to buy 3 lots of EURO-DOLLAR and her broker’s bid-offer spread is 1.05000 - 1.05002. Jennifer hits the buy button at 1.05002 but evidently on her account history she sees her trade entry price was in fact 1.05005 - because the broker had such poor liquidity at the quoted price she experienced ‘slippage’, with the broker working the request at the next best price to get a volume weight average price.
For traders, especially higher volume traders, it’s a cost you simply don't need. Pepperstone places great emphasis on providing exceptional liquidity conditions so that the chance of slippage and related trade costs are both reduced.
Liquidity is an important but often unappreciated factor in trading. Why not experience the Pepperstone difference?
Learn more about trading CFDS
Here at Pepperstone, our customers love the product range along with the low cost to trade and the fact so many markets are open around the clock. Interested? Watch the more videos to learn or speak to our team about whether CFDs are right for you.