May 8, 2020
What is Market Depth?
Market depth is the market’s ability to sustain relatively large market orders without impacting the price of the security. This 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 very much related to the liquidity and volume of a security. But that does not mean that every stock showing high volume will have a good one. 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 interesting thing about this is, actually the orders that are contained in the given price (if it is not limited by size), or the least favorable price that will be obtained by an market 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 depth since it is unknown.
For example, if the market for a stock is “deep”, there will be a sufficient volume pending orders on both the bid and ask side, preventing a large order from significantly moving the price.
Market depth 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 then 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 the current activity.
How to use market depth in your favor?
Market depth data helps traders determine where the price of a particular asset could be going towards. For example, a trader can use this data to understand the bid-ask spread for a security, along with the volume accumulating on both the sides. Securities with strong depth will usually have strong volume and be more 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 depth data allows traders to profit from short-term price volatility. For example, if a company goes public, traders can stand by for strong buying signals which would help them know that the price of that firm could be rising for some time.
But we at Venteskraft, always advice to not use market depth on its own. It is always better to combine with any other technical indicators or some different setups. Read “Meet Your Daily Expenses With Stock Market: For Beginners“, By Mahin BS, CEO Venteskraft. There is a lot more information and knowledge about the same topic and also a lot about the Indian Stock Market. The book majorly also covers how one can meet his or her day to day expenses with the Indian Stock Market.