Smart position sizing & risk management

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Market Structure

Liquidity

How easily a stock can be bought or sold without significantly affecting its price.

What is Liquidity?

Liquidity refers to how quickly and easily a security can be bought or sold at a stable price. High liquidity means you can enter and exit positions with minimal price impact.

Signs of high liquidity

  • Tight bid-ask spreads (1-2 cents)
  • High average daily volume (millions of shares)
  • Deep order book: large sizes at multiple price levels

Why it matters

Low liquidity means slippage: the price moves against you as your order fills. This is especially dangerous with large positions or during fast moves. Always check a stock's average volume before trading it.

Related Terms

Bid-Ask Spread

The difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask).

Dark Pool

Private exchanges where large institutional orders are executed away from public markets to avoid moving the price.

Float

The number of shares available for public trading, excluding restricted and insider-held shares.

Level 2 / Order Book

A real-time display of all pending buy and sell orders at every price level, showing market depth.

Liquidity Sweep

When price briefly breaks above a high or below a low to trigger stop losses before reversing sharply.

Slippage

The difference between the expected price and the actual fill price, usually caused by fast-moving markets or low liquidity.