Liquidity is the depth of buying and selling interest at and around the current price. In a liquid market a large order is absorbed with little movement; in a thin one a modest order moves the price against itself. For a retail trader, liquidity is experienced through two things: the spread, which widens as liquidity thins, and slippage, which grows as the price the broker can obtain moves away from the price quoted.
Where it comes from
Banks, funds and market makers quoting prices, in the aggregate a broker sees through its liquidity providers. The major pairs during London and New York hours are the deepest markets in the world. Exotic pairs, index CFDs outside exchange hours, and any instrument at the daily rollover or on a public holiday are thin. Liquidity also withdraws in the seconds before a major release, because quoting a firm price through an unknown number is a losing proposition for the quoter.
When it vanishes
The daily rollover at 10pm UK time. The Sunday open. Public holidays in the US or UK, when the relevant banks are closed. The last week of December. The moment of a high-impact release. Any market shock, when quoters step back at once. In each case the spread widens and stop orders fill further from their levels.
Gold at 2pm on a Tuesday has a 25-cent spread and a stop order slips by 8 cents. At 10.01pm the same day the spread is $1.40 and a stop order slips by 60 cents. At 1.30pm on the first Friday of the month, in the second after the US employment figure, the spread is $3 and a stop fills $2.20 away from its level. Nothing about the strategy changed. The liquidity did.
Retail position sizes are far too small to affect liquidity, so the concern is never that the EA's own order moves the market. The concern is timing: an EA that places orders when liquidity is thin pays for it in spread and slippage, and a strategy with tight stops pays most. A spread filter is the practical proxy for a liquidity filter, since the spread is what a thin market shows the platform. An EA with no such filter, trading through rollover and news, will show that in its average slippage, and the live record is where to look.