Water availability affects tree species performance and distributions in tropical forests. However, there are no studies that have measured detailed spatial variation in soil water availability within a tropical forest. This limits our understanding of how water availability shapes the demography and distributions of tree species within tropical forests. In this dissertation, I measured detailed spatial variation in soil water potential (SWP), the relevant measure of water availability for plant performance, in the seasonal tropical moist forest of the 50-ha Forest Dynamics Plot on Barro Colorado Island, Panama. In Paper 1, I mapped spatial variation in SWP across the 50-ha plot in various stages of the dry season using information on topography, soil type, dry season intensity and more. In Paper 2, I quantified the soil moisture niches of species in terms of demographic responses (growth and mortality) and species distributions. I related seedling growth and mortality responses to SWP of 62 species to their distributional centre along the SWP gradient, using data from 20 years of annual seedling censuses across 200 seedling census sites. I found that species that grew faster (slow) with increasing SWP were more common on wetter (drier) parts of the SWP gradient. Moreover, wet-distributed species grew faster on the wet side of the SWP gradient than dry-distributed species. Mortality was unrelated to species distributions but decreased strongly with seedling height. These findings indicate that species with a growth advantage with respect to SWP grow faster out of the vulnerable small size ranges, reducing their mortality in later seedling stages and thus shaping species distributions indirectly. This mechanism is a form of niche differentiation that contributes to species coexistence. In Paper 3, I related seedling growth and mortality responses to spatiotemporal variation in water availability with responses to light availability, another highly limiting resource in tropical forests. I found an interspecific trade-off in responses to shade versus inter-annual drought (dry season intensity): species that performed relatively well in the shade performed worse during more severe dry seasons and vice versa. This trade-off enables coexistence, because species are adapted to perform well under either shade or drought. In sum, water availability contributes to the maintenance of the high diversity of tropical forests through hydrological niche differentiation and a trade-off between performance in shade versus drought. Future work can use my SWP maps and species responses to SWP to identify the functional traits that underlie the species responses and improve Dynamic Global Vegetation Models. Finally, my work facilitates the prediction of future species composition, diversity and ecosystem functioning of tropical forests with shifts in rainfall patterns caused by climate change.