Market depth
Also called Depth of market, DOM, Order book, Level 2, Market depth chart
Market depth is the live list of pending buy and sell orders at each price above and below the current quote. It shows how much volume can trade at each level before the price moves.
Market depth tells you whether your order will fill at the price you see. If your order is bigger than the size waiting at the best price, the rest fills at worse prices. The gap between the price you saw and the average you got comes straight out of your account. The 5-lot example below shows how much.
Reading a market depth ladder: bids, asks and size
A depth display has two sides. Bids are buy orders waiting below the current price. Asks are sell orders waiting above it. The highest bid and the lowest ask are the best prices, and the gap between them is the spread.
Each row shows a price and the size waiting there, in lots or contracts. A deep market has plenty of size close to the price on both sides. A thin market has little size and gaps between the levels. In a thin market, even a modest order can move the price.
The ladder below shows a sample book. Sell orders sit above the spread, buy orders below, and bar length is the size at each price. In a thinner book, these bars would be shorter and some prices would be empty, so the same order would fill further from the quote.
How market depth changes your fill price: a 5-lot example
The figures here are an illustrative example on EUR/USD, using the ladder above. One standard lot is 100,000 units, so one pip is worth $10 per lot.
You send a market buy for 5 lots. Only 2 lots wait at the best ask of 1.10010. Your order takes those, then 2 lots at 1.10020, then 1 lot at 1.10030. This is called walking the book.
You saw 1.10010 on screen, but you paid an average of 1.10018. That $40 also moves your break-even point 0.8 pip higher.
Use this rule. If your order is no bigger than the size at the best price, a market order should fill at the quote, unless the book changes before your order arrives, which is common in fast markets and around news. If it is bigger, you have two choices:
- place a limit order at the worst price you will accept, or
- split the order and let the book refill between the parts.
Where market depth appears on your trading platform
Most platforms open depth in a separate panel next to the order window, often labelled depth of market or order book. Stock platforms usually call it Level 2. Charting sites often draw it as a depth chart: the running total of bid size is a curve on the left and the ask total is a curve on the right. A steep jump in a curve marks a large order at that price.
Why forex market depth shows only part of the market
Stocks and futures trade on central exchanges, so their book shows every displayed order on that exchange. Spot forex has no central exchange. The depth your forex platform shows comes only from your broker's liquidity providers, which is a small slice of the whole market. Some feeds show sizes only at the top level, or show no sizes at all. Read forex depth as "what I can fill here," not as the market's total supply and demand.
Checks before you trade using market depth
- Compare your size to the best level. If your lots are more than the size at the best price, expect to walk the book.
- Watch whether a big order stays put as price gets close. A common misread is "a large bid wall means price will bounce." Large orders can be cancelled in a fraction of a second. If a wall disappears as price nears it, it was never a real level. The snapshots below show how this looks.
- Allow for hidden size. Iceberg orders show only part of their volume, so the real depth can be larger than what you see.
- Look again before news. Liquidity providers pull orders ahead of big releases. The book thins and the spread widens.
- Check what actually traded. On stocks and futures, a level only acted as support or resistance if exchange volume went through there and price held. Spot forex has no market-wide traded volume, so check whether price actually held at that level on the chart, and treat your broker's tick volume only as a rough guide to activity.
- Know your feed. Find out whether your broker's depth shows real sizes or only indicative quotes.
FAQ
Does market depth matter in option trading?
Yes, and often more. Every strike and expiry has its own book, and many are thin with wide spreads. Check the size before you trade, and use limit orders rather than market orders.
Can I build a trading strategy on market depth alone?
Rarely on its own. Depth changes from second to second, so it is most useful for timing entries and exits on very short charts, such as the 1-minute chart. On longer timeframes, combine it with price levels and traded volume instead of trading the book by itself.
Why is my market depth window empty?
Usually your broker does not stream depth for that symbol, or the market is closed. Try another symbol during active hours. If it is still empty, ask your broker whether they provide depth for that symbol.