# Market Depth



## stargazer (5 December 2007)

Hi all

I have read that market depth is important but it is not the be all and end all insofar as decision making.

I am trying to work out how to read market depth for my own learning.  Obviously if there are say 100,000 buyers there must be 100,000 sellers.

Many times i have seen that some say the buyers are greater than the sellers or vice versa.  There were 129 trades on this stock etc and there were more buyers than sellers. How can this be if you must have a equal amount for the transaction to occur.

I have tried to make some judgement by observing but haven't been able to get quite right.

Could someone with the knowledge explain the best way to interpret the market depth of say 10 deep as they are on some sites.

Cheers
SG


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## new_trader1984 (5 December 2007)

hi stargazer,

The market depth is where orders have been placed at set prices, if i wanted to buy into pru at a 1.50 but current share price is 1.55 the order would be placed and sit in the market depth buy side until the price drops to 1.50 before filling, if there are 3 wanting to buy at that price its first in line that will get the order filled first once it reaches that price. The buy at market is the buyer or seller buys or sells the shares at the current share price and if lots are entering or leaving a stock it can mean a higher buy price or lower sell price.

The market depth can give you an idea of direction of share price might go by looking at the top 5 orders on each side if the buy side is stronger then sell side it could send price up if sell side bigger then buy side price could fall but this can change from people willing to buy at market which doesnt go into the market depth since the order is filled at the current price.

Phoenix a1 software has got a charting package which using the full market depth the top 5 and top 8 market depth prices to show which side is stronger which some people also might find helpful but the same can be worked out by adding the top 5 market depth on each side together and seeing which side has more shares. 

For a trade to go through if 1 buyer wants a 100 000 shares but there is 5 sellers with smaller parcels the order will purchase the shares from all 5 sellers until the 100 000 share order is filled. Thats where the trades number comes from since that would be 5 trades to fill that order. If you look at course of sales you will see a lot of trades these are all from the sellers of the shares for the day.

Hope this helped.


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## chewy (5 December 2007)

I think you are getting confused with market depth and actual transactions. 
Obviously with actual transactions there must be equal seller and buyer quantities.

But market depth is just a list of pending transactions - i.e. transactions that people have placed at limit (i.e. at a set price). So if a stock is doing well for the day it will likely have more buy orders waiting than sell. And vice versa if a stock is having a bad day it will probably have more sell orders waiting than buy orders.

(But I am a noob too - so maybe I am wrong!)


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## stargazer (5 December 2007)

Hi 

Thankyou for your explanations they were helpful.

Cheers
SG


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## stargazer (5 December 2007)

Hi 

I was looking at BMX the first 5 lines of market depth there are 1,416,793buyers and 2,076,181sellers  current price 24c current volume 163,430 ther has been 11 trades.

This would suggest the stock is more likely to go down than up?

Does the number of buyers or sellers on each individual line waiting make a difference in assessing the stocks direction. 

Cheers
SG


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## new_trader1984 (5 December 2007)

hi stargazer,

If you add the top 5 amounts of shares on buy side and divide by number of buyers it can give you an average amount each buyer wants to purchase. This doesnt mean there isnt 1 big buyer and 2 smaller buyers if there was 3 buyers at one price level but its just to give a quick idea of the size of the trades if all were buying equal amounts. If you do that for both sides it can provide an idea of which side wants more shares per order which may help but with bmx they are roughly the same amounts per order wanting to be bought and sold since the sell side has more sellers which averages out to the same amount of shares abouts to the buy side. 

I am new to charting but there is a lot of pressure on the sell side so a move up will need some news to give buyers more reason to buy but the 820 000 shares at 23 cents might stop it from moving much lower too. 

If you go to the inside trader website and click on education 2 headings come up the neilsen indicator and smart money they might offer some help with the buyers and sellers and trying to use it to see which direction the share price might go. You dont need to join to see them since its just a page that explains how it is meant to work.

The market depth can help sometimes but wont always work on shares since at market trades can affect the market depth and change price movements quickly.


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## stargazer (5 December 2007)

Thankyou Newtrader1984.

Will do a bit more reading on it but you have given me a good explanation and idea.

Cheers
SG


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## Porper (5 December 2007)

stargazer said:


> Hi
> 
> I was looking at BMX the first 5 lines of market depth there are 1,416,793buyers and 2,076,181sellers  current price 24c current volume 163,430 ther has been 11 trades.
> 
> ...




Stargazer,

Don't read too much into maket depth.

In my experience which ever side of the depth is stacked up, lets say for example there are many more buyers than sellers, the stock price usually goes down !! That wasn't a misprint, especially with the spec stocks, usually there are millions of shares wanted just below the present price, as the price goes down, these bids  get either removed or changed to a lower price.

Newbies get sucked in, don't be one of them.Market depth rarely gives you an indication of where price is heading, there are exceptions like anything.


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## stargazer (5 December 2007)

Thanks Porper

Well thats good news its not just me.  Like today i was watching CUL and thought many sellers price should be going down and bang from 13.5 to 14.

cheers
SG


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## bearmarket (19 December 2007)

May I ask is it possible that sometimes when the market depth is shown that there might be buyers and sellers in the market that brokers have not told the security exchange about their client orders.

bearmarket


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## cordelia (27 December 2007)

Porper said:


> Stargazer,
> 
> Don't read too much into maket depth.
> 
> ...


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## gavank (27 December 2007)

Hi 
Im a university accademic who plays the market - nice game this year 463 trades and 12 (twelve) losses.... 
If you want my view on market depth..... WELL....market depth and total market volume on buy vs sell , is the king and the only reason to trade a stock.
I am a short term trader... very short term   ..... sometimes a matter of seconds.....
today I had 3 winning runs in the matter of minutes on CNM 30.5 c to 42c
($1000)..... its not big money , but it beats losing and it certainly builds up

look for 3:1 ratio on buy vs sell and you want market action ... that is 2,000,000 by 820 am  (8am open in perth= 10 am sydney) + 100 trades 
I want action I dont want to wait..... I have research labs to monitor after 9 am and I have to go kite surfing in the afternoon to clear out my "gills"  . These are Priorities and must be met.  to hell wiith investingand waiting, watching and losing.
Well thats my view and Im sticking by it

Beautiful day in perth today.... sea breeze is building ... baby daughter still asleep ..... but this afternoon , "me thinks" , its going to be beach, surfing, dinner and watching a magnificent sunset over the ocean..LIFE IS GOOD OVER HERE


Merry christmas and Happy new year

gavan


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## stargazer (28 December 2007)

Hi Gavan



> If you want my view on market depth..... WELL....market depth and total market volume on buy vs sell , is the king and the only reason to trade a stock.




How is Total Market Volume important in the context of a single stock having a substantial volume and buying pressure.



> look for 3:1 ratio on buy vs sell and you want market action




Is this calculated on the 10 deep like E trade or elsewhere.

Cheers
SG

Happy New Year


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## Timmy (28 December 2007)

gavank said:


> Hi
> Im a university accademic who plays the market - nice game this year 463 trades and 12 (twelve) losses....
> If you want my view on market depth..... WELL....market depth and total market volume on buy vs sell , is the king and the only reason to trade a stock.
> I am a short term trader... very short term   ..... sometimes a matter of seconds.....
> ...




Nicely done gavank - you have posted your approach guidelines before and I replied I am a big fan of this momentum/short-term type of approach.  Can I ask, how do you narrow down to a short-list of shares you will look at each morning - is it an end of day scan done the previous night or a live scan during the morning or a combination of the two or am I on the wrong track?  Just to put my position in perspective I am trading US futures overnight (not this week b/w Christmas and New Year though, volumes too low so getting some sleep!) using a short-term/momentum approach too.  Hope you don't mind the questions?


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## IFocus (28 December 2007)

gavank said:


> Hi
> Im a university accademic who plays the market - nice game this year 463 trades and 12 (twelve) losses....




When ever I see numbers like this my cynical side says "fishing expedition"

Focus


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## stevo (28 December 2007)

As has already been said don't read too much into market depth. It gives an indication of what might happen, but how many buyers / sellers want to broadcast there intentions in the market depth. 

I often avoid putting an order into the market unless I know that it will be immediately filled - so the order does not show in market depth. To do this I will split orders up. I am sure that there are many more orders waiting in the wings than market depth will ever show you. 

stevo


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## jackson8 (29 December 2007)

gavank said:


> Hi
> Im a university accademic who plays the market - nice game this year 463 trades and 12 (twelve) losses....
> If you want my view on market depth..... WELL....market depth and total market volume on buy vs sell , is the king and the only reason to trade a stock.
> I am a short term trader... very short term   ..... sometimes a matter of seconds.....
> ...




gavan how can you follow so many stocks in such a short time frame to find where the action is
i have had similiar success with stocks like elk fdl etc. and try to keep an eye on the forums as they seem to carry a lot of weight with some of these movements but miss heap of good opportunitys each day because of no. of stocks to watch
maybe case of having a well researched watch list !


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## chops_a_must (29 December 2007)

gavank said:


> Hi
> Im a university accademic who plays the market - nice game this year 463 trades and 12 (twelve) losses....
> If you want my view on market depth..... WELL....market depth and total market volume on buy vs sell , is the king and the only reason to trade a stock.
> I am a short term trader... very short term   ..... sometimes a matter of seconds.....
> ...




Yeah bollocks.

I watched the ES get smashed wide open on the upside late last night on a pivot, with the sellers outnumbering the buyers by more than 6:1.

I've seen good market depth result in SP rises, just as I've seen it result in a reverse. It just seems to be a good excuse for large on market sells/ buys in the opposite direction of the depth, and to me now, extreme market depth is a signal to get out of the trade. CNP was a classic example of this...


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## ithatheekret (29 December 2007)

The theory leaks a little considering there is off market buy and sell lists , not to mention one would not be seeing the total transaction depth either side well down the line . Unless of course you're a major brokerage then you might have a chance of perusing the entire depth .

I'm with Chops ......... bollocks .



PS.. What about time and speed ?


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## Timmy (29 December 2007)

Chops and theekret, I have heard the term you used many times but I looked it up on the Urban Dictionary anyway, quite a good site!  

Anyway, back to substance.  I am not a big fan of market depth, very open to manipulation, but I would like to hear more about gavank's approach.  

More specifically, to the points you raise...    

Chops:
1.  I would contend there is huge difference in the relationship between price and market depth with an instrument like the ES compared to a small market cap. share like CNM.  What applies to the ES will not necessarily apply to a small cap. equity.
2.  The relationship between market depth and subsequent small cap. share price movement is a complex one, at times the price will move to size, at other times not.  Knowing when the behaviours will be different is the challenge.

Theekret:
The two points you raise are valid, again I would say knowing when and when not to use the market depth is the challenge.  Also, can you expand on your time and speed comment?


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## IFocus (29 December 2007)

Timmy said:


> Chops and theekret, I have heard the term you used many times but I looked it up on the Urban Dictionary anyway, quite a good site!
> 
> Anyway, back to substance.  I am not a big fan of market depth, very open to manipulation, but I would like to hear more about gavank's approach.
> 
> ...




Timmy market environment changes the market depth environment, in the specs during bull market conditions with serious momentum there is some merit but in run of the mill price tends to be king

Focus


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## chops_a_must (29 December 2007)

Timmy said:


> Chops:
> 1.  I would contend there is huge difference in the relationship between price and market depth with an instrument like the ES compared to a small market cap. share like CNM.  What applies to the ES will not necessarily apply to a small cap. equity.
> 2.  The relationship between market depth and subsequent small cap. share price movement is a complex one, at times the price will move to size, at other times not.  Knowing when the behaviours will be different is the challenge.



My comments above were about equities.

The only time I've found depth useful, in my limited time in futures, is towards closing when positions have to be reversed. I know TH uses open interest to work out his directional bias. How effective that is in the short term, I wouldn't know. I'm not even sure that can be counted as market depth, but it appears to work well for him at least.


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## ithatheekret (30 December 2007)

Timmy said:


> Chops and theekret, I have heard the term you used many times but I looked it up on the Urban Dictionary anyway, quite a good site!
> 
> Anyway, back to substance.  I am not a big fan of market depth, very open to manipulation, but I would like to hear more about gavank's approach.
> 
> ...





Hang about , I may be on my 5th Stella , but you answered this question .

But without sprouting algorithmic strategies till I puke , lets just say the hunter can become the hunted .
If one could backtest executions effectively , it would have to deal directly with liquidity ( good subject at present , ...... cheers ..... ) , then real time data , which is 9/10ths the domain of third parties or more , which in itself can be a mine field when the transparency and accuracy needed to support the theory can be conflicting to any data messages structured by the software one is using , be it their own or another parties . 

If you can merge all the suggested , lets call it a theoretical montage , where you could actually read each layer of the composites , the missing link would then be true sentiment , which in itself presents a wider timeframe than that available in market depth . Sentiment can be seen as realtime movement but the changes can't or at least not yet , to date they can only be observed once committed to execution and that can change twice in a blink primarily because of off market trades . Now if you could see market depth in off market , match it with liquidity projections , maaaaaaate , then we would have definition , with true definition who needs a crystal ball ( rhetorical question ) . It would be a transitive construction within a realtime market , which could take into account systematic differences and be bl**dy marvellous if it could be done . Even algos can't predict change in sentiment only price reflects that , then the equation can then start again as long as a trend can be summised . That then starts another barney in the market depth theory , because trend identification again is still post market .

Anything relying on pre is in for a post shock , so that cuts out any avenue on that theory straight away , as there is no measurement for pre acceleration phenomena for shares , methinks it can be concluded that market depth can only show a portion of the mass , there is no dimension to the viewer that could possibly take into account velocity .

Then we have another arguement again in velocity .


Bollocks was easier .


PS .. I like your stop theory .


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## Timmy (30 December 2007)

Well IFocus, Chops and Theekret, thanks for the replies - I reckon this thread is getting more and more interesting.  I have said it before, but will again - I am here to learn (I'll never stop, so long as I have one finger capable of pressing the button to execute my order), and the replies from you three to my post have given me plenty to ponder beyond simply the relationship between mkt. depth and small-cap share price movement.  Have a look at this list:

From IFocus and Chops...
Relationship between momentum, market depth and price.
Futures mkt. depth towards closing vs. other times.
Open Interest - short term effectiveness.

From Theekret...
Your post may have been Stella-assisted, but great stuff - great framework for considering sentiment/sentiment changes/price/price changes.  And off-market trades - the bane of much analysis...  
And thanks for the comment on the sig!


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## ithatheekret (30 December 2007)

Thanks for that Tim ,

The debate can go deeper still , if we were to roll the microscope over liquidity versus whole price impact functions , the coding on that would gain attention , because a simple ratio would not be suffice . 

Post market with the aid of the course of sales does have an appeal to it that some may view as beneficial . I use this at times , but primarily in conjunction with VWAP when browsing a share price entry .

If anything with regards to market depth , I must concede that the buyers side is more of a catalyst than the sellers . At least there you can attempt to ascertain some idea of what others are willing to pay for a stock/share etc. , but then that doesn't help us when block bids hit the market , blowed if I know how one would navigate that . 

Then there's the magical disappearing buyers versus the totally off the planet sellers who place astronomical prices on an exit and usually end up as  fixture of the depth and not a participant of the market in real terms . 

Some are obviously off with the pixies there ..... and yet market depth would have us use them in the equation . Then again there's the ones who will not wait , the impatient ones , where do they fit into the math ? This is all assuming that one has DMA in the first place without having to refresh every split second to catch the changes in the line up for starters . 

Bit of a quagmire in the least of terms ..........


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## cordelia (30 December 2007)

chops_a_must said:


> Yeah bollocks.
> 
> I watched the ES get smashed wide open on the upside late last night on a pivot, with the sellers outnumbering the buyers by more than 6:1.
> 
> .




what does "es" mean


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## chops_a_must (30 December 2007)

cordelia said:


> what does "es" mean




It's the S&P 500 mini's.


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