Won’t get fooled again? Interpreting size on the Depth of Market.

The Depth of Market (or DOM) is very much the flavor of the month right now in the retail trading world. This is a good thing and a bad thing. It’s good because the Depth of Market information can really make a difference in your trading. It’s bad because some rather unscrupulous vendors are claiming it’s some sort of magic bullet. When a trader they teach tries to use it, they end up disillusioned and never get to benefit from the ‘good stuff’. So let’s separate the good from the bad…

First let’s take a look at market depth history from yesterday on Crude (note that my PC is set 12 hours ahead of EST – so this is roughly 9:15am-11:50am EST).

depthofmarket3

Jigsaw Trading Auction Vista (Crude Futures)

The red areas represent sell side market depth, aka offers, aka asks, aka ‘resting’ sell orders. The lighter colors represent areas where there is more depth (more contracts at that level).

The blue represents the buy side market depth aka the bids and again, lighter colors mean more bids.

If we look at the top – we can see just after 9:30, the market tried to move up to 54.00 and suddenly a large quantity of sell side market depth appeared. The market then moved down. A little later, the market approached 54.00 again and the market move down. Later on, at 11:30 when the market approached 54.00 for a third time we moved down and we ended down at 53.44 later on.

This sort of activity is why many vendors are selling Depth of Market as “the next big thing”. They know that many aspiring traders want trading to be boiled down to a single decision point and so they say “buy our tools, look for the depth and sell” and of course – that is a net losing strategy.

Depth of Market Nuance

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Jigsaw Trading
After suffering a 30% drawdown at the hands of “independent financial advisors”, Peter started trading in the early 2000’s, figuring there was no point in paying people to lose money for him. By 2005, Peter was day trading NASDAQ stocks and later discovered the value order flow. He struggled with the way order flow data was presented so designed tools that organized Order Flow information more rationally and Jigsaw Trading was born. Those tools are now the #1 ranked software on Investimonials.com.
Today Peter spends his time trading and helping other traders through the Jigsaw community, articles and free one on one sessions.
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Jigsaw Trading

Jigsaw Trading

After suffering a 30% drawdown at the hands of “independent financial advisors”, Peter started trading in the early 2000’s, figuring there was no point in paying people to lose money for him. By 2005, Peter was day trading NASDAQ stocks and later discovered the value order flow. He struggled with the way order flow data was presented so designed tools that organized Order Flow information more rationally and Jigsaw Trading was born. Those tools are now the #1 ranked software on Investimonials.com. Today Peter spends his time trading and helping other traders through the Jigsaw community, articles and free one on one sessions.

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