Why it matters
Liquidity determines your true exit cost and your ability to manage risk.
Decision use: treat this term as a risk input. If you can’t observe it, you can’t size for it.
Common trap
Confusing ‘liquid instrument’ with ‘liquid right now’.
Example
An index is liquid most days, but in a shock the book thins and fills worsen.
Operational cue: if you can’t point to it on the chart, in the DOM, or in your broker logs, treat it as a story and trade smaller.
Notes
Liquidity is conditional, not guaranteed.
Quick rule
- If you see this repeatedly, you are in a different regime than your model assumes.
- Regime change usually means position size change.
- When in doubt: trade smaller, or don’t trade.