Depth of Market Basics
Table of Contents
what is a depth of market
different depths of market
execution
terminology
absorption
reloading
1-way auctioning
2-way auctioning
closing remarks
what is a depth of market?
Depth of market (DOM) or price ladder provides insight into the order book of the desired instrument.
Bids (buyers) & Offers (sellers) are seen in the book transacting between each other, therefore creating price action & the tempo of the tape.
Every financial instrument has a depth of market, orderbook to view with varying degrees of liquidity.
Schematic on the bottom showcases the depth of market for E-mini Nasdaq-100 (NQ).
Resting Offers [right red column]
Price [far left column]
Volume profile [middle light blue column]
Market Sell Orders [second left column]
Market Buy Orders [far right column]
different types of depths of markets
Different markets will have different types of price action & liquidity, where liquidity is how easily are shares bought or sold.
E-mini S&P (ES) & E-mini Nasdaq (NQ) shows ES has higher liquidity than NQ due to
larger resting bid/offer sizes
tight price movements
where NQ’s resting bid/offer is confined to single & double digits, thus creating the jumpy behavior opposed to ES slow back & forth.
terminology
Absorption - aggressive buyer/seller pushing into large passive limit orders & unable to significantly move price.
Reloading - buyer/seller putting up fresh bids/offers, sometimes with the intent of collection.
1-way auctioning - price moving in one direction.
2-way auctioning - price ping-ponging in a range.
Acceptance - agreement between buyers & sellers for fair price.
Long - bullish position in form of a buy order.
Short - bearish position in form of a sell order.
Stalling - Price ceases to make progress & traders are awaiting for clues for continuation or change in trend.
Velocity/Tempo - Speed at which price is transacting; typically, velocity should gain momentum & speed if the directional thesis is correct.
Stop Hunt/Run - Market participants forced out of trade positions in either long or short positions, typically seen at adjacent candle highs or lows.
Spoofing - Manipulative tactic to persuade other participants to take a trade position only to have it move the other direction.
absorption
Absorption - Aggressive buyer/seller pushing into large passive limit orders & unable to significantly move price.
In the schematic, the dark red boxes at the bottom indicate heavy selling yet prices are unable to continue lower, hence the close above the sell block.
Conversely, a similar situation occurs 3-candles later where buyers are absorbed & the candle close is at the lower region of the 10-min range.
Majority of the session trades balanced in 2-way auctioning.
reloading
Reloading - buyer/seller putting up fresh bids/offers, sometimes with the intent of collection.
Breakdown of the schematic
Price is uptrending higher, bids following each pullback
Hits a mini-roadblock as an offer at 6.00 comes in (circled) & continues to reload as buyers try to push their way past
Price offers/trades lower & offer begins to follow from 6.00 to 5.50 to 98.00
As subtle as the behavior seems has potential to lead to larger moves as traders get trapped & a domino of stops get triggered.
1-way auctioning
1-way auctioning - price moving in one direction.
Characteristics include but not limited to
Little to none pullbacks & when there are pullbacks, they are quick & shallow.
Likely consists of major run on stops (long or short), which creates a quick impulse leg that gains momentum.
This type of movement can also be labeled as price discovery assuming price trades above or below an adjacent critical swing point.
2-way auctioning
2-way auctioning - price moving in both directions in the search for fair price.
Characteristics include but not limited to
Back & forth trading in a fixed range as buyers & sellers have accepted price for what it is worth at the time being.
Balanced range carves out as traders await new pieces of information for the next directional opportunity.
This can also be labeled as price efficiency as fair price is established for the time being.
Closing Remarks
Depth of market is a powerful tool to be used to gain a deeper understanding of the market’s inner mechanics real time in conjunction with other market related tools.
Real-time information is key & essential for making informed trading decisions as the tides can and will shift on a dime.
There are some pieces of information I plan to add into this document in the future, this material is suffice for the time being.
Thank you all for your patience as I emerge from a tough situation (hence the hiatus) & am looking to ramp up content volume.
Program used for demonstration purposes is by Jigsaw, LKS10 for 10% off.