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Liquidity in the stock market. Basic principles of trader's work.

Liquidity in the stock market. Basic principles of trader's work.

An important component of a trader's work on the exchange is the ability to work with liquidity. This term means the ability to quickly buy or quickly sell any exchange-traded instrument (stock, futures or currency pair) without loss in time or loss in price, i.e. a market participant can obtain the desired asset at the best market value as quickly as possible. For a trader, the liquidity of financial instruments with which he trades on the exchange is a key factor in his success. Since a trader makes a large number of transactions and how quickly at the moment he can buy or sell a particular asset, his income and his possible financial losses depend. When a financial asset has low liquidity in the order book, that is, a small number of orders to buy and sell it, it may be better for a trader not to work with such an instrument at all.

 

Why is it important to trade only liquid assets?

 

The answer to this question is quite simple and quite obvious. Since the main goal of a trader is to buy cheap and sell dear, any experienced stock market participant knows: the moment of buying should be chosen during periods when the so-called "bearish trend" is on the market, that is, many assets on the exchange are getting cheaper, including the most liquid ones. ... It is at such moments that a trader needs to act as quickly and efficiently as possible. It is interesting to note that at times of market downturns, the liquidity of many assets increases, even those that are far from the most attractive both from the point of view of trading and from the point of view of long-term investments.

 

What can trade in non-liquid assets lead to.

 

Sometimes securities of companies that are not interesting to investors for long-term investments can be very interesting to traders. It's all about volatility. After all, traders make money precisely on the change in the price of an asset. And it often happens that the most illiquid financial instruments can be the most volatile, that is, the most profitable from a trader's point of view. And here it is important not to make a mistake. In times of downturn in the market, many investors and traders will begin to sell off their assets.

 

And, according to Murphy's law, at this very moment on one of the illiquid positions you will achieve the desired profitability and want to sell it. But to whom, if now everyone is selling their assets? Who will buy an already illiquid asset, and even during a downturn in the market? It is important to remember that such a situation is possible and not risk a significant part of your capital in pursuit of 2-3% profitability.

10.11.2021
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