Market depth

What is Market Depth? 

• Market depth lists all buy and sell orders in the market for a particular security. It is measured in the ability to support relatively large market orders without much affecting the price of the security. 

• The market depth is split into those wanting to buy and those wanting to sell. It’s then further broken down into the prices that those buyers and sellers are willing to buy or sell at. 

Significance of Market Depth - 

• Both traders and investors look at market depth to examine the different prices and volumes (bid and ask volumes) of orders accumulating below and above the market bid and ask prices. Securities with good depth will be relatively liquid, and large orders will not affect price significantly.

• On the other hand, securities with poor depth are more likely to have their price affected by large orders to buy and sell.

• Market Depth provides traders with a measure of the number of pending buy and sell orders for a currency pairing at a range of different market prices. 

• Depth of Market provides traders with information regarding of the amount of liquidity available at different market prices. The larger the volume of buy and sell orders at each price, the greater depth the market is said to have. Depth of Market is often referred to as the order book, due to the fact Depth of Market data shows the current pending orders for a currency or security. Depth of Market data is usually available from exchange for a fixed fee; however those trading Forex may be able to make use of Tier II Depth of Market data straight from their brokerage.

Uses of Market Depth Data - 

• Scalping: Some traders who use scalping strategies use Depth of Market data to help them determine when they should enter in and out of positions. Depth of Market data is particularly useful to those who scalp as technical indicators and candlestick charts tend to be less reliable over shorter time frames. Very few traders base their short term trading decisions solely on Depth Market data, and instead use depth of market data alongside technical analysis and other trading tools. 

• Feel out the Market: Seeing Market Depth allows the trader to see order flow from the brokerages perspective, which offers traders with a unique look at the markets directional bias. Traders can keep an eye on order flow and begin to get a general feel of where the market might be headed.

• Large Volume Traders: Depth of Market data is also useful for those who are trading larger volume as it allows them to see how much liquidity there is at each price level. VWAP (Volume Weighted Average Price) depth of market functionality is particularly useful for those who are placing very large trades as it allows them to see expected entry price instead of the quoted spot price. The majority of retail traders will find enough liquidity for their needs at every price level, but being able to see liquidity levels is still useful.

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