How To Read Market Depth

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Market Depth

What is Market Depth

Market depth is the market’s ability to sustain relatively large market orders without impacting the price of the security. Market depth considers the overall level and breadth of open orders and usually refers to trading within an individual security.

BREAKING DOWN Market Depth

Market depth is closely related to liquidity and volume within a security, but does not mean that every stock showing a high volume of trades has good market depth. On any given day there may be an imbalance of orders large enough to create high volatility, even for stocks with the highest daily volumes. The decimalization of ticks on the major U.S. exchanges has been said to increase overall market depth, as evidenced by the decreased importance of market makers, a position needed in the past to prevent order imbalances.

Market depth is a property of the orders that are contained in the limit order book at a given time. It is the amount that will be traded for a limit order with a given price (if it is not limited by size), or the least favorable price that will be obtained by a market order with a given size (or a limit order that is limited by size and not price). Although a change in price may in turn attract subsequent orders, this is not included in market depth since it is not known.

For example, if the market for a stock is “deep”, there will be a sufficient volume of pending orders on both the bid and ask side, preventing a large order from significantly moving the price.

Depth of market also refers to the number of shares, which can be bought of a particular corporation, without causing price appreciation. If the stock is extremely liquid and has a large number of buyers and sellers, purchasing a bulk of shares typically will not result in noticeable stock price movements.

Market depth usually exists in the form of an electronic list of buy and sell orders; these are organized by price level and updated in real time to reflect current activity. While at times, the data is available for a fee, most trading platforms now offer some form of market depth display. This allows all parties trading in a security to see a full list of buy and sell orders pending execution, along with their sizes—instead of simply the best ones.

How Traders Use Market Depth Data

Market depth data helps traders determine where the price of a particular security could be heading. For example, a trader may use market depth data to understand the bid-ask spread for a security, along with the volume accumulating above both figures. Securities with strong market depth will usually have strong volume and be quite liquid, allowing traders to place large orders without significantly affecting market price. Meanwhile, securities with poor depth could be moved if a buy or sell order is large enough.

Real-time market depth data allows traders to profit from short-term price volatility. For example, if a company goes public (begins trading for the first time), traders can stand by for strong buying demand, signaling the price of the newly public firm could continue an upward trajectory.

Market Depth

Hi, again – yes its Norbert the German banker!, ok maybe not but I am likely more close to a german banker then he will ever be lol. Today I am going to demonstrate the correct way to read Market Depth, many more brokers are offering access to this tool for the average trader. Market Depth is the likely one of the most important aspects of my daily trading especially for deciding weather or not to enter or exit a trade. What I find so ironic is that very few traders understand how to use it or even what it is. In the videos below I will go over exactly what it is and some of the ways I use it to help me enter and exit trades. These trades are live for real money so you get a true feel for what I am seeing.

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As you can see in this video I am trading with the trend on the momentum drop of the AUS/USD. No matter the type of trade you see in this video I am using Market Depth to see how the banks are reacting and moving orders around this fast drop to see if an entry or exit opportunity is needed. I was able to clearly see an exit near the low of that day due mostly to Market Depth.

In this video we see I am using not only Market Depth to help me see how the banks are lining up but also you will see me trade ahead of an expected ALGO buy cycle along with using “HALO” an MT4 system I created. By putting all of these elements together in unison, it gave me a good tactical and strategic positioning on this EUR/USD trade.

In this video, well there are no words you just have to watch it because I said its cool and that is all you need to know! If you put in the screen time and watch Market Depth along with the basic concept of “price follows size” You should be able to improve your entry and exits as well as timing on trades. Using Market Depth for me and understanding that I trade what I see not what I think, gives me an edge over most other traders that I exploit at every turn ;) Hope you like and find the videos useful. ENJOY.

Depth of Market (DOM)

What Is Depth of Market – DOM?

Depth of market – DOM is a window that shows the number of open buy and sell orders for a security or currency at different prices. The depth of market measure provides an indication of the liquidity and depth for that particular security or currency. The higher the number of buy and sell orders at each price, the higher the depth of the market. This data is available from most exchanges, often free of cost but sometimes for a fee.

Depth of market data is also known as the order book since it shows pending orders for a security or currency. The book records the list of buyers and sellers interested in a particular security. There is also a matching engine that uses the book to determine which trades can be made.

Depth of Market – DOM Explained

In addition to measuring supply and demand, market depth is also a reference to the number of shares which can be bought of a particular corporation without causing price appreciation. If the stock is extremely liquid and has a large number of buyers and sellers, purchasing a bulk number of shares typically will not result in noticeable stock price movements. However, if the stock is not particularly liquid and doesn’t trade as often, purchasing a block of shares will have a more noticeable impact on the stock price.

Depth of market is typically represented as an electronic list of all outstanding buy and sell orders; these orders are organized by price level and updated in real-time to reflect all current activity. A matching engine pairs up compatible trades.

While at times the data is available for a fee, now most trading platforms offer some form of market depth display. This allows all parties involved in the transaction of a security to see a full list of buy and sell orders pending execution, along with the size of the trade – instead of simply just the best options.

Key Takeaways

  • Depth of market, or DOM, is a trading tool that shows the number of open buy and sell orders for a security or currency at different prices.
  • DOM, also known as the order book, is essentially a measure of the supply and demand for a particular security.
  • DOM also refers to the number of shares that can be bought of a particular stock without having an impact on the price.

Using Depth of Market Data

Depth of market data helps traders determine where the price of a particular security could be heading in the near future as orders are filled, updated, or canceled. For example, a trader may use market depth data to understand the bid-ask spread for a security, along with the volume accumulating above both figures. Securities with strong depth of market (e.g. a highly popular large-cap company like Apple (AAPL) will usually have strong volume and be quite liquid, allowing traders to place large orders without significantly affecting market price. Yet those securities with poor depth (more obscure companies with smaller market capitalizations) could be moved if a trader places a large buy or sell order.

Being able to view the depth of market information for a particular security in real-time allows traders to profit from short-term price volatility. For example, if a company goes public (begins trading for the first time), traders can stand by for strong buying demand, signaling the price of the newly public firm could continue an upward trajectory. In this case, a trader might consider buying shares and selling them once appreciation has reached the desired level and/or if the trader observes selling pressure mounting.

Real-World Example

For example, if a trader is tracking Stock A, they might look at the buy and sell offers for the company on a depth of the market screen. Stock A might currently be trading at $1.00, but there are also 250 offers at $1.05, 250 at $1.08, 125 at $1.10 and 100 at $1.12. Meanwhile, there are also 50 offers at $0.98, 40 offers at $0.95, and 10 each at $0.93 and $0.92. Looking at this trend, the trader might determine that the market is pricing in Stock A going a bit higher. Armed with this knowledge, the trader can decide whether or not this is the right time to jump in and buy, sell or take other action.

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