What does it mean?
The Euro FX futures contract could have a value of 125,000 EURO, but you would be able to buy or sell this contract by posting a performance bond of about 2,750 USD, which is only 2% of the contract value (EUR/USD 1.1000).
Liquidity
A condition that describes the ability to execute orders of any size quickly and efficiently without a substantial affect on the price.
Liquidity can be described in terms of volume and open interest (abbr. OI). Each unit of volume represents a complete transaction. When one trader buys a contract and another trader sells the same contract, that transaction is recorded as one contract traded. Open interest represents the total number of contracts, either long or short, that have been entered into and not yet offset or fulfilled by delivery. Each open transaction has a buyer and seller, but for calculation of open interest only one side of the contract is counted. Volume and open interest are reported daily and are used by traders to determine the level of activity in a market for a given day or a price movement.
To quickly gauge the liquidity of a market, traders may look at 1) the distance between the best bid and ask prices (bid-ask Spread), 2) the number of limit orders pending in the market at each bid and ask level (Level II) and 3) the frequency with which trades take place (Time & Sales).
Trading in liquid markets, where there is enough volume for you to enter and exit your orders without substantially affecting price, will help to ensure that you can exit a position just as easily as you enter it.
Type of Order
Market Order
The simplest and most common type is the market order. When you place a market order, you agree to either buy or sell at the best available price.
Stop Order
An order that becomes a market order when a particular price level is reached. A sell stop is placed below the market; a buy stop is placed above the market. Sometimes referred to as stop loss order.
Limit Order
An order that allows the buyer to define the maximum price to pay and the seller the minimum price to accept (the limit price). A limit order remains on the book (Level II) until the order is either executed, canceled or expires.
Market Regulation
Futures markets are regulated (Example: CFTC, NFA) to foster open, competitive and efficient futures markets, and to protect market users and the public from any fraud, manipulation or abusive practices.