Do you feel like your trading isn’t moving forward quickly enough? Or that you need to enhance your trading edge? The Depth of Market is going to give you an insight into the market you never thought possible. Many traders enter the market but still feel it’s all a bit random. They have no real way to assess if the market is on their side other than watching where price moves. Traders using the Depth of Market might not win every trade but they have a much closer relationship with the market. They can see the ‘battle’ between buyers and sellers play out in real time and react to it accordingly. It’s the missing dimension that makes the difference between loss and profit for many traders.
It’s no secret that Proprietary (prop) trading firms tend to start their intern traders off trading using just the Depth of Market (DOM). On the other hand, retail traders tend to start off with chart based trading, usually from a book or online course. It’s also no secret that the success rate of prop traders is far higher than retail traders trading at home. So what are the benefits of the Depth of Market and how can the retail trader incorporate Depth of Market into their trading?
The Jigsaw Depth of Market
There is some resistance to using the Depth of Market. Partly it’s because chart based trading APPEARS to be more simple. Yet I’ve met traders that have been trying to figure out how to trade from charts for more than 5 years without any luck. There are an infinite combinations of indicators and timeframes, and many traders are convinced that it just requires them to find that “right combination” that will give them a trading signal they can use forever without much thought.
There’s also the fact that many people consider the Depth of Market to be ‘old fashioned’, yet almost all of the charting techniques people learn today are 30 years old or more.
The bottom line is that charts show you the result of trading. They show the ‘effect’ of trading. On the other hand, Depth of Market is all about showing you the cause of moves. Of course, this isn’t totally black and white. It’s nuanced. Charts can show you where clusters of positions are, that may cause a stop run and in turn areas that may be defended at a later time. To know if that stop run is about to occur right here, right now – that’s the job of the Depth of Market.
The first step in benefiting from Depth of Market is understanding it in the first place. In the video below, John Grady first takes us through the basics of Depth of Market. The bids. the offers and the contracts trading at those bids and offers. He then takes a look at the cumulative volume profile, placing orders and then onto the benefits. He looks at why the Depth of Market is important and how it is helpful. In the final part, he takes a look at “giving up the bid/ask spread and it’s effect on P&L” – and if you don’t understand what that means, see the first part of the video.
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