The market depth provides an indication of the liquidity for a trading product. It is presented in the form of a real-time electronic list of buy/sell orders lined up to be transacted on a trading platform. It is useful because it indicates to traders how many bids and offers have been placed for a security or currency.
Market depth can give a clear indication as to whether the market is likely to rise or fall. If there is a much larger quantity of sell orders compared to buy orders, it could mean that the price of particular security could drop due to selling pressure.
Financial products are normally listed by volume and by price level and can help traders measure market sentiment.
Example of market depth
If a commodity is extremely liquid and has many buyers and sellers, purchasing a large amount of that commodity will most likely not result in noticeable price movements. However, if the commodity is not very liquid and does not have a lot of demand for it, purchasing a bulk of that commodity will have a more noticeable impact on its market price.
Key takeaways:
- Market depth provides an indication of the liquidity and market depth for a trading product
- Market depth shows all bids and offers, so it is a good guide to understanding market sentiment