The rotating detonation engine (RDE) has attracted considerable interest as a potential new propulsion system, owing to its ability to self-pressurize, its high thrust-to-weight ratio, and its simple structure. This paper provides a comprehensive review of the latest research advancements and challenges associated with the application of liquid fuels in RDEs. The study begins by focusing on the applicability of various liquid fuels in RDEs, examining the effects of fuel parameters—such as the equivalence ratio, the total temperature, the degree of pre-evaporation, and the droplet diameter—on detonation wave propagation and engine performance. Subsequently, the impact of inlet parameters and the optimization of combustor performance on detonation waves, along with control methods for mode-switching mechanisms, are investigated. Finally, the paper summarizes the common issues and challenges encountered in the application of liquid fuels in RDEs. These include droplet atomization, mixing and evaporation, detonation wave control, and combustor cooling. To address these challenges, future developments in RDEs may focus on four key areas: the use of complex fuels (such as blending fuels, sustainable aviation fuel, and other biofuels), detonation wave mode control, combustor cooling technologies, and the integration of RDEs with turbomachinery. These advancements will further propel the development of liquid-fueled rotating detonation technology.