The Ultimate Guide to
Depth of Market
In forex trading, depth of market (DOM) shows the levels of a particular currency that are being traded at different prices. This allows traders to understand the supply and demand, and therefore liquidity of the currency at each price point. A good depth of market means that there will be good liquidity. Where the market depth is low, or poor, there is less liquidity, and this means that a large order has the potential to affect the price.
Liquidity is important to traders who want to take advantage of short-term movements, and therefore want to be able to sell at a moment’s notice. Market depth data is therefore valuable for giving the trader an indication of how quickly they will be able to liquidate their position.
Pending orders are also included in the data, which is why it is also known as the order book. As an example of how the order book works; if the current price is $10, the order book will show how many orders are pending at $9, $11, etc. It doesn’t just show the bid and the ask prices, but also the volume of all bids and offers, in real-time, organised by price level.
Market depth is also an efficient way to check the activity of a particular currency, and traders can find out if there is enough depth and volume to complement their trading style at that given time.
Why it Matters
All the information that DOM provides can be useful for determining whether to place an order. Market depth data allows traders to understand whether the market is weighted towards buy orders or towards sell orders. If more buy orders are open than sell orders, for example, the share price may start to increase because of the increased buying support. However, when there are more sell orders, price tends to weaken due to the selling pressure.
Knowing these resistance and support levels can help traders to establish their entry and exit points.
Brokers that offer Depth of Market
The MetaTrader 5 trading platform displays depth of market data, and is available from regulated brokers such as Roboforex, Exness and Forex4You, amongst others.
Trading with a regulated broker is always preferable to using a broker that is not regulated, and therefore not bound by the high standards set out by regulators.
Conclusion
It is recommended to invest time into learning how depth of market works as this can provide traders with indications about market conditions. However, traders need to bear in mind that not all orders get reflected in an order queue. Some traders (usually who execute large volumes of trades) manage to hide the size so that other traders do not get alerted. Nonetheless, a study of depth of market can help spot support and resistance levels along with other useful information related to the market.
