What is a Depth of Market (DOM)?
The Depth of Market commonly referred to by traders as the "DOM" / Level 2 / Order Book, is one of the most under utilized indicators in the trading world. This tool is powerful in a market such as index futures where the ledger of the asset is centralized within one exchange. This can provide great insight as to the true positioning within the asset as opposed to forex , commodity and others that are traded over a few different exchanges.
The DOM provides you with real time buy and sell orders being filled to the very tick value of the asset you are trading along side with the ability to truly read the overall pace of the aggressive market participant and better gauge the move coming off or into a key level of "demand" or "supply."
Below is an illustration of a DOM from one of my preferred Order flow software tools Jigsaw Daytradr:
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Who is the Depth of Market For?
Before we dive into the details of what a Depth of Market is, it is important to consider which kind of participant can gather value from this indicator. The information provided does have a diminishing return depending on the time frame of a trader that you are. So lets rule out who can receive the most amount value from this indicator. The amount of value received will be for those who are intra day trading, whether that is scalping or will be completely cash prior to the end of the session.
There is nothing more useful for gauging market sentiment when day trading than using live market transactions between buyers and sellers than the Depth of Market. As opposed to a chart which shows past events chronologically itemized by the time frame of the users choice, the DOM provides immediate responses to changes in behavior within the market place that can only be gathered in a chart minutes after the shift has occurred.
There are many key components that a vital when attempting to understand the value the DOM can provide.
DOM Key Components:
- Volume / Liquidity / Participation
- Pace / Rate of Change
The level of volume - pace of the movements that we as traders can spot opportunities that can be visually seen on the DOMs are going to be completely dependent on the asset we are trading since all stocks have different characteristics. As a simple iteration The Nasdaq (NQ) naturally is more volatile and thinly traded as the movements in the thicker market like the S&P 500 (ES).
Gathering real time experience reading the Depth of Market has no shortcuts to learning that screen time can provide. Through time in the markets you will see the nuanced price behaviors these assets have when moving in and out or price levels that become or already are key levels of interest for bulls and bears. If you wish to get real time experience with walkthrough analysis of how to interpret opportunity check out my youtube channel where I live stream and trade using this very indicator.
Using nothing other than the DOM I have been able to buy the very low or shorting the very high of the trading session consecutively, check out the video below from one of my live trading session from : 2/15/2024