Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Understand the Basic Difference Between Liquidity and Volume

1 min read

Liquidity and Volume are the two different concepts widely misunderstood by the traders community. High Volume typically represents higher number of executed orders or high trading transactions, however high liquidity represents the order book is stuffed with thick limit orders at Bid and Ask prices levels. More closer the liquidity , lesser the market impact cost and higher the market efficiency.

Higher liquidity not necessarily has to transform into high volumes unless the active buyer or seller who places the market order are aggressive. And also low trading volume doesnt mean low liquidity.

There is a also a magical belief that more the liquidity is more the buyers or sellers in the system. However on reality what you see from the TOP 5 BidxAsk (aka liquidity) is just pending limit orders which are waiting for the fill by market orders and what you cant see is the aggressive buyers or sellers who are likely to punch the market orders which can be realized only in realtime.

Top 5 BidxAsk Orderbook for Nifty Futures

So even if the scrip shows high liquidity, markets may not move faster, as lesser the interest shown by the active buyers/sellers at that given instant. And when aggressive buyers or sellers are highly active even in a less liquidity environment market could build momentum and could bring some neat and clean price action.

Top 5 BidxAsk Orderbook for PC Jewellers Futures

Low liquidity segments are often dominated by the market maker or market maker algos . The market maker ensures there is always a buyer or seller for the investor at an accurate price.

Retail traders are interested in volume and bigger institutions often focus on liquidity zones to accumulate or distribute as higher liquidity zones keeps their trading cost optimal. At times bigger institutions goes for a liquidity hunt where most of the people place their stops the process is called stop hunting

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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One Reply to “Understand the Basic Difference Between Liquidity and Volume”

  1. Hi Sir,

    Which software/tool is this where we can see the top 5 bid ask data in bubble chart.

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