What is Day Trading Liquidity and Why It Matters

Jun 28, 2021

Written by:
Al Hill

Liquidity is a measure of how easily one can buy and sell a position in the market, and it is a very fundamental element of trading, especially day trading. There are a few steps you can take in your day trading to make liquidity nothing but a small concern.

If your account is a boat, then liquidity is the stream. When you put that boat out onto the market’s waters, you expect to be able to move and turn as you wish.

The drier the stream, the slower the boat can move. And this can be dangerous, especially for larger boats.

When day trading, you need to make sure that your boat can always float easily and cleanly without being too large for the stream.

What is Liquidity?

Aside from the boat analogies, let’s use the real estate market. Certain times of the year, people are typically looking for homes to buy. This may fluctuate depending on the season, the location, the type of home, etc.

Ideally, you want a “liquid” home if you are trying to sell it. In other words, if your home is in the right market, the right spot, at the right time, you may actually find an offer higher than your asking price! And that’s great.

Compare that to a slow market.

Nothing is moving, nothing is selling. Your location is bad, and the house might need work. You go through agent after agent trying to sell your home.

Foreclosure for sale

Mark down after mark down, and you finally get rid of it for a loss.

The stock market is no different. And unless you are a long term investor willing to hold out through the dry spells, you want to avoid these markets.

For day trading, this can also spell trouble if you are oversized for the amount of liquidity available that day. Here are a handful of things that could go wrong:

  1. You won’t get filled when trying to sell limit orders.
  2. Market orders may experience massive slippage.
  3. You might ended up being a bag holder.
  4. You’ll be tempted to average down to support your position.

Like trying to sell a home in a bad market, you’ll try all kinds of gimmicks and tricks to get out of your position, only to lose.

Where to Find Liquidity

Just like finding a home in an up and coming neighborhood, within a popular city, in a growing area, you want to look for stocks with the same momentum.

Though volume and liquidity are not entirely related, liquidity is still most often found in markets and stocks with the highest volume. High volume means there is significant investment and speculative interest in a market.

At any given time, you should be able to buy into and sell out of positions at will.

Along those lines, high volume stocks, bonds, exchange-traded funds or currencies will have the greatest number of market makers.

Market Makers
Market Makers

This is important because they are matching buyers with sellers and ensuring the market flows easily.

Exchange Traded Funds (ETFs)

Exchange-traded funds can generally be a great source of liquidity to investors.

Since an exchange-traded fund is usually a combination of stocks or commodities bundled together and sold in a package, investment banks and algorithmic trading computers help keep the price of exchange-traded funds in line with their underlying products.

In doing so, hundreds of thousands of shares are bought and sold, adding to the number of buyers and sellers, and ultimately, day trading liquidity.

The popular SPY ETF, made to track the performance of the S&P500, generates daily volume of nearly 200 million shares.

In an eight hour trading day, that means that 25 million shares are traded per hour. This is 416,000 shares per minute or nearly 7,000 shares per second!

SPY 180 million share day.
SPY 180 million share day.

Finding day trading liquidity here should not be an issue.

Be advised, however. There are some low volume and low liquidity exchange-traded funds. However, since these are often unprofitable for fund issuers, there are only a few on the market at any given time.

Most illiquid day trading ETFs are of the currency tracking variety.

Blue Chip Stock Liquidity

Blue chip stocks are also a common source for stock trading liquidity.

Popular names like MSFT, AAPL, GOOG, NFLX, among others, are a haven for day trading professionals.

They attract investment banks and other institutions that trade millions of shares per day.

Often, day trading professionals will pick a few stocks and trade them exclusively.

Most often these shares are those of larger companies like the ones mentioned above, or TSLA, GE, and others.

Low Float Stock Liquidity

For the most part, low float stocks have extremely low liquidity. However, there are occasions when these lower priced, lower float stocks have “outlier” days.

EYES "outlier" 500 million liquidity day
EYES “outlier” 500 million liquidity day

Like the example above, some news or event triggers an entourage of day traders chasing a fast buck. A stock like this, which was averaging only 500k shares per day, traded over 500 million in a single day.

The end result for these events can often be ugly. But for the nimble day trader, these can actually provide decent liquidity.

We cover a lot of this in our posts on Float Rotation and VWAP Boulevard, if you want to check them out.

Currency Markets Liquidity

The currency markets often have the best liquidity, as up to $3 trillion in currencies trade hands on any one day. Plus, since the currency markets attract worldwide interest, there are far more market actors and investors to buy and sell amongst each other.

Stocks, in contrast, usually attract mostly domestic interest.

Practice Scanning for Liquidity

Here at TradingSim, our built-in market scanner does most of the work for you. Aside from our custom scanner, we give you the ability to scan for the top performing volume profiles on any given day.

Top Volume filter for TradingSim Scanner
Top Volume filter for TradingSim Scanner

This gives you an advantage while practicing your day trading strategies by filtering out any lower liquidity stocks.

If that isn’t enough, we now offer the ability to filter your scan results by average daily volume, float, market cap, index and more!

TradingSim Scanner
TradingSim Scanner


Most traders should be able to find liquidity in the names and financial products they want to trade the most.

Since the invention of at-home and online trading, more traders have been brought into the markets. Most financial products attract enough interest to stay liquid, even little-known small caps these days.

Just be sure to check your position size, the spread on the bid and ask, and the average volume. This should keep your risk in check.

Tags: Day Trading Basics

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