What is market depth and how to view it?

Depth charts are a valuable tool for traders, making for better informed decisions about when to enter or exit positions. However, it must be noted that all analysis is made with the benefit of hindsight and should not be seen as a guarantee of future price movements. For example, suppose stock A is trading at $8.50, and the market depth data indicates a massive cumulation of sell orders at $8.75. In that case, it becomes a good candidate for the resistance level of the asset as the price is unlikely to go below that point. Level 2 data was first introduced in 1983 and offered statistics relating to the market depth and momentum of the assets.

• Notice the large number of red asks/sells on the right side of the image at $6,000/BTC.
• A high buy wall may indicate that traders are confident that the price will not fall below a predetermined level.
• The orders that are considered while evaluating market depth are maintained in the limit order book.
• Additionally, traders also have to deal with margin requirements and trading restrictions which further constricts traders’ ability to manipulate the market beyond natural reason.
• Order books and market depth are accessible on almost every official exchange across various financial asset classes.
• Data about market depth enables traders to determine the directions of the price movement of a particular security.
• High buy walls can also indicate that traders believe an asset will not fall below a certain price.

NinjaTrader supports more than 500,000 traders worldwide with a powerful and user-friendly trading platform, discount futures brokerage and world-class support. NinjaTrader is always free to use for advanced charting & strategy backtesting through an immersive trading simulator. He estimated that gold prices could reach up to $2,200 an ounce by the end of 2024. To plot out the green line, or the bids, you place a dot on the horizontal access at every point. Tally the bids at each price point or below and place a dot representing that number on the vertical axis.

All that glitters is gold

For example, an asset may have only a few orders within the current price and many orders at a much higher or lower price. While the asset will have an increased number of orders and thus high liquidity, it will not be considered to have market depth since a large enough order can easily swing the asset’s price. In this article, we look at what market depth is, how it works, and how to read and use market depth data—regardless of your trading or investing strategy. Depth of market also refers to the number of shares of a particular stock which can be bought without causing price appreciation.

Level 2 quotes display the size of the best bids and offers with their respective depths. Day traders use Level 2 stock data to gauge the direction of the stock market over the short-term. Numbers flash on the screen and then disappear quickly, especially during volatile trading moments. Also, it can be hard to tell what order are buy order, and what orders are sell orders.

Finding the Average Buy or Sell Price for Large Trades With Low Volume Stocks