Fluency is a term to describe the ability to easily hold a conversation with native speakers, and understand what is being said to you. It has to do with the skill of interacting in a smooth way, using the amount of words that you know to convey any idea. It does not mean to know all the words in a language, but to be able to combine a “relatively small” amount of lexemes (the 2000 most common lexemes) to convey your thoughts. When you are fluent, you can get your point across even without knowing a word because you can use other words to describe it, and you can understand what is being said to you by inferring the meaning from context.
You can be fluent but not necessarily be able to read a book or a magazine without consulting a dictionary or be able to understand a movie with ease. That can require the knowledge of many more words.
There are many layers of fluency, and fluency is not a line that you cross. You can be fluent even if you don’t know an apparently common word, as long as you are able to explain what that word represents.
Article about Fluency and Proficiency: