LIQUIDITY

The realities of trading are directly related to the liquidity of the market. Even though liquidity can have more than one meaning, lack of liquidity has only one trading result: poor execution. A liquid market does not necessarily mean good fills, but an illiquid market assures bad ones. Two types of illiquidity are most often encountered in the markets:
1. Fast-moving markets, in which there are mostly buyers or sellers, and few traders are willing to take the other side of the position.
2. Inactive markets, usually in the deferred months in which there is less interest in either hedging or speculating.
The fast market is the result of a supply-demand imbalance, or perceived imbalance, where everyone is in agreement on the direction the market should move. The few hedgers and traders willing to take a position do little to offset the vast number of orders that flood the floor, pushing the price in the direction of the trend. In the inactive market, a premium must be paid to attract another trader to take the opposite trade.