How to analyse market depth?

[TPI]

Hi,

Just referring to the screenshot below of the market depth at a particular point in time for stock VET (just picked this stock as it is topical), how do you go about analysing the market depth?

Can you gain anything meaningful by doing this?

This is what I can interpret from it below...

Looking at the screenshot, it shows 100 buyers and 45 sellers, so it looks like there are more buyers than sellers, and thus demand > supply.
There are also 2646692 units in the buy column and 1668340 units in the sell column, so again demand > supply.
That being said, if you only look at the totals of the first 10 price points shown in the market depth, there are 47 buyers and 29 sellers, so again demand > supply, but with 1004631 units in the buy column and 1139490 units in the sell column, so now supply > demand.
From this I take it that at this particular point in time, sellers outweigh buyers at these more realistic price points around the current market price.
The share price has fallen since then which seems to corroborate this view.

Is there any logic to this or is this interpretation way off the mark?

I read elsewhere that the market depth doesn't include buyers/sellers who are willing to trade at the current market price as opposed to at a specific price point, so perhaps this has an influence that you can't see too?

Does anyone here make trades on the basis of what they see in the market depth screen?

Thanks.

 

[tech/a]

Personally No.

But I do trade based upon volume flow and its effect of price range and close.
depth to me has little to no meaning as its supply and demand at the level on offer
that is of interest to me.

BUT
I do know of futures traders who look for islands of price in depth---but in real-time data within the price being trade. Meaning that anything outside of a range that's not likely to be traded in the next 20 mins is of no interest.

These Islands tend to come and go and often form in front of your own eyes at levels 2-10 ticks away from the coal face. The idea is to see if they are fed (Offer support or resistance) or smashed----impulse moves in a direction
often OPPOSITE to the direction the smashing was/is occurring.

 

[TPI]

as its supply and demand at the level on offer
that is of interest to me.

You mean like in the screenshot the volume is 4848 at $0.23 on the buy side and 29533 at $0.235 on the sell side, ie. supply > demand, so you just focus on this rather than the other price levels?

BUT
I do know of futures traders who look for islands of price in depth---but in real-time data within the price being trade. Meaning that anything outside of a range that's not likely to be traded in the next 20 mins is of no interest.

These Islands tend to come and go and often form in front of your own eyes at levels 2-10 ticks away from the coal face. The idea is to see if they are fed (Offer support or resistance) or smashed----impulse moves in a direction
often OPPOSITE to the direction the smashing was/is occurring.

Referring to the screenshot, do you mean like the large volume at $0.20 and also at $0.18 on the buy side would be considered support levels, and if the price falls below this you will get impulse moves in the other direction??

 

[Boggo]

Depth is one of the items I keep an eye on, the problem though is it only shows the buys or sells that are in the market.

Two examples below. One is CAJ (I hold) and GEM (I sold a few weeks ago). Note the depth circled in red on both.

If I was to have a look tomorrow and the depth numbers had reversed on CAJ and if the price is declining towards my stop then I have two prepare to exit ticks.

That was what actually happened with GEM before I exited.

Impossible to test, not always a true or accurate guide but definitely a factor that I monitor.

(click to expand)

 

[tech/a]

You mean like in the screenshot the volume is 4848 at $0.23 on the buy side and 29533 at $0.235 on the sell side, ie. supply > demand, so you just focus on this rather than the other price levels?



Referring to the screenshot, do you mean like the large volume at $0.20 and also at $0.18 on the buy side would be considered support levels, and if the price falls below this you will get impulse moves in the other direction??

No More like this.

https://www.youtube.com/watch?v=5aiWIwaUPWk

 

[barney]

Technical analysis aside, VET has dropped from $3.60 to around 20 cents in the last three months. Picking the current illiquid market depth correctly is likely to be a bit of a punt in the short term. There is some recent volume support at around 18 cents but these quick droppers often languish for a long time before reviving substantially ..... Good one for Bottom Pickers though!

 

[DeepState]

Is there any logic to this or is this interpretation way off the mark?

I read elsewhere that the market depth doesn't include buyers/sellers who are willing to trade at the current market price as opposed to at a specific price point, so perhaps this has an influence that you can't see too?

Does anyone here make trades on the basis of what they see in the market depth screen?

Thanks.

Your interpretation is entirely reasonable on first pass. The problem arises when someone else arrives in the market and knows that's what you think and games you by changing volumes to cause you to react in accordance with these beliefs. And a third person comes along and sees the game and adapts to the strategy that you both are entangled in. And so on...and then you all learn what's going on and try to outfox the guy that is trying to outfox all of you.

Welcome to adaptive learning algo. And before algo, there were smart LOB traders doing the same thing. The initial interpretation is misleading. LOB trading is much much more difficult than it appears to be on first sight. The vast bulk of volume is undisclosed. That applies to people who trade within the spread (and thus don't appear until a trade is done pretty much) and those not in the order book, but whose volume will appear under certain conditions.

What looks like price/volume support is often used by a hidden volume supplier just looking for an opportunity to move the position.

If it were that easy....

I look at this stuff when the stock I am trading has market makers on each side. If I am patient and do not have a strong opinion on near term direction, I'll just sit within the market maker spread and wait for someone to hit me. The market makers are evident by price/volume LOB disclosures. I am not trying to outsmart anyone's games. I just offer liquidity at a better price than the market maker if someone wants it.

 

[CanOz]

SMB...The kings of intra-day equity...

 

[CanOz]

For the OP, the reason I posted the SMB video is to show how they use the held bid/offer in the depth as a final catalyst to take the trade...so the depth is seldom used in its own.

 

[TPI]

Thanks for the replies, some new terminology for me to digest! Will post back once I've watched the videos.