Liquid names

A fish market at dawn is liquid: plenty of buyers and sellers, so you can sell a crate at close to the posted price. The same market at closing time is not: to sell right now you take whatever the last buyer offers. In stocks, liquid names are the ones that trade in large amounts every day, with a narrow gap between the buying and the selling price and deep queues of orders waiting on both sides.

Liquidity matters in a test because it sets the cost. In a liquid name a modest order pays a spread of a few basis points and leaves the price where it found it. In a thin name the same order pays a wide spread and pushes the price against itself as it fills, and a backtest that trades at the closing price never sees that bill. Liquid is not the same as large, and not the same as high turnover: a big company can have a quiet day, and a small one can be frantic.

Pitches like the phrase "stick to the liquid names" because it sounds like a safety rule. It is a cost rule, not an edge. In the logbook's momentum entry the filter made every trade cheap to execute, and the picks inside it still could not be told from names drawn out of a hat. Cheap to trade and worth trading are two separate questions, and a test has to answer both.