[Summary]
The law of liquidity is the idea that ease of buying and selling influences price and risk.
When you translate the law of fluidity into actual examples, it becomes easier to see the difference between situations where it can be used and situations where it is difficult to use.
In actual investment, the first step is to check the trading volume and the thickness of the board. However, we cannot overlook the fact that thin stocks may not sell as expected.
In this article, we will organize the rules of liquidity not as "knowledge" but as steps to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, divide according to the law of liquidity.
When looking at the law of liquidity, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. The law of liquidity is not the only material used to make decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Thinking about the law of liquidity with practical examples
If we look at the law of liquidity as an example, we first make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What we see in the law of liquidity |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
The problem with the law of liquidity is not only when you lack knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Focus on one situation where the law of liquidity works well
- Even if the price movements are similar, if the background is different, they are treated as different things.
- View not only successes but also failures using the same criteria.
- Check if you can reproduce it with your own amount of funds
The important thing here is not to settle on a single correct answer based solely on the law of fluidity. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using the law of liquidity as a basis for actual judgment, check at least these five points.
- Can you explain in one sentence the purpose of looking at the law of liquidity?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking the law of liquidity is not to act faster, but to reduce unnecessary errors in judgment.
Summary
The law of liquidity is a material for organizing investment decisions. Even if you read it as an example, your judgment will be inaccurate if you treat it as a standalone buy/sell signal.
The points to keep in mind are as follows.
- Decide first the purpose of looking at the law of liquidity
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat the law of liquidity as a tool to pause before buying or selling, rather than a word that forces you to make a hasty decision.