Market depth measures the market's ability to execute large buy or sell orders without significantly impacting the assets’ market price. It gives you a real-time snapshot of the demand and supply for a security that shows the total volume of pending orders at various price points.

Why is market depth important for trading?

Market depth provides insights to traders, especially short-term traders, which helps them in making smart trading decisions and managing risks.

1. Show liquidity

In a high-depth market, there is a high volume of bids and asks at multiple price levels, signifying high liquidity. Trading in a high-depth market helps traders enter and exit trades without experiencing large price changes. In a low-depth market, there is low or limited volume, which increases the risk of price changes during entry or exit, particularly in large trades.

2. Identify support and resistance levels

A high volume of buy orders within a specific price level can indicate a strong support level at which the buying interest increases, preventing the price from falling further. A high volume of sell orders around a price level can indicate a resistance level after which you can expect the prices to fall.

3. Understand market sentiment

Market depth helps you interpret market sentiment by providing a real-time view of market orders. A higher Buy order compared to Sell orders signals a bullish market sentiment, whereas a higher sell orders signal a bearish market sentiment.

4. Predict price movements

Traders analyse an order book to gauge the potential short-term price movement of a security. For example, an order book with higher buy orders will set the price in an uptrend.

Use market depth to analyse market sentiment and price trends and make informed trading decisions.