Depth of Market | Access Tighter Trading Spreads | OANDA (2024)

FAQs

What does depth of market tell you? ›

Depth of market (DOM) is an indicator of the current interest in a stock or other asset. It can be read as a signal of the likely direction of a stock's price. It is used to judge the optimal time to buy or sell an asset.

The calculation for market depth is simply the cumulative volume of the base asset at various percentages from the mid price. For example, the “Bid Volume 10%” for BTC/USD on Coinbase would represent the volume of all bids for BTC falling within 10% of the mid price at which the order book snapshot was taken.

The shorter the periods of your trade, the more important the size of a spread. For instance, if you hold a position open for several minutes and your gain is 1 pip, a 0.3-pip spread would mean paying 30% of your profit for executing this trade.

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Data about market depth enables traders to determine the directions of the price movement of a particular security. Securities that are deep or with a strong market depth allow traders to place bulk orders without creating significant price movements.

How Traders Use Market Depth Data. Market depth data helps traders determine where the price of a particular security could be heading. For example, a trader may use market depth data to understand the bid-ask spread for a security, along with the volume accumulating above both figures.

When there is a wider spread, it means there is a greater difference between the two prices, so there is usually low liquidity and high volatility. A lower spread on the other hand indicates low volatility and high liquidity.

A good spread starts between zero to five pips, benefitting both the broker and the trader.

The most common ratio will be '2:1', selling twice as many short options against the long options, and ultimately “financing” the cost of the long spread with an extra short option and turning the trade into a net credit.

Pepperstone is known for its ultra-low spreads, which can be as low as 0.0 pips on the most liquid currency pairs, such as the EUR/USD. The broker's spreads are variable and can fluctuate based on market conditions, but they are consistently among the tightest in the industry.

Are tight spreads good? ›

Wider spreads typically indicate higher perceived risk and economic uncertainty, while narrower spreads suggest stability. That's something any investor might want to watch, even if you don't own a single bond. Learn more about investing in bonds.

Spreads (the difference between the bid price and the ask price) typically widen just prior to closure of the markets and when they open, to reflect decreased liquidity in the global markets. These widened spreads could trigger stop-loss orders or margin closeouts when a position is open at this time.

In simpler terms, it shows the volume of buy and sell orders within a 2% range of the current market price. This depth gives traders valuable insights into the market's liquidity and the current sentiments of other traders. Now, let's dive into how Bitget, my preferred exchange, handles this aspect.

A stock has a deep market if it consistently achieves a high volume of trades. A stock with a deep market is highly liquid, meaning there is a balance between buyers and sellers that keeps the price stable. For traders, a deep market allows large trades to be made without immediately affecting the price of the stock.

Market depth helps in price discovery by providing information about the current market price and potential price movements. It shows the number of buy and sell orders at different price levels, which helps traders and investors to understand the supply and demand dynamics.

Market depth: The chart can analyze the market's liquidity level. A high level of market depth indicates a liquid market with many purchasers and sellers. In contrast, a low market depth level can suggest a call with less liquidity and more potential volatility.