How to understand a Market Depth Chart to determine liquidity Medium

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How to understand a Market Depth Chart to determine liquidity Medium

October 5, 2022 Cryptocurrency exchange 0

how to read market depth chart

This will keep your portfolio diversified and reduce risk while you learn more about the stock market. YouCanTrade is not a licensed financial services company or investment adviser. Click here to acknowledge that you understand and that you are leaving to go to YouCanTrade. The overlap between $5,996 and $5,983 is possible because of sFOX’s aggregated orderbook from many global exchanges and liquidity providers and is an arbitrage opportunity to sFOX traders.

how to read market depth chart

If the stock is extremely liquid and has a large number of buyers and sellers, purchasing a bulk of shares typically will not result in noticeable stock price movements. To adjust the zoom level, focus on more recent prices, or zoom out to see the bigger picture, use the + and – buttons at the top of the chart. Besides this feature, Public also gives you access to stocks for as little as $5. They offer fractional shares, so even if you want to invest in a high-end company, you don’t have to spend thousands. Volumes are good to know, but shouldn’t be your only determining factor when buying a stock. Usually, trading volumes increase when there is major news (good or bad) about the company.

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In that regard, the stack of buy orders is called a “buy wall” and the stack of sell orders is called a “sell wall”. The exact middle point in the chart corresponds to the current market price of the cryptocurrency. Market depth refers to the ability of the market to sustain a substantially larger order without making an impact on the security’s market price. Usually, while calculating market depth, trading within one particular security is considered.

At the very bottom of the chart, you can see many small, vertical lines. The value of the company doesn’t change, but the share price might. Companies will often do this if the price isn’t in line with how to read market depth chart competitors or to attract smaller investors (if the share price decreases). A stock split is a strategic move done by the company’s board of directors to issue more shares of stock to the public.

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Each line on the depth chart is created by plotting dots which indicate the quantity of an asset at a particular price. Individuals sell the same asset for different prices which creates the step like visual representation we see on the graph itself. The sell wall rises in proportion to the number of unfulfilled sell orders at a given price. A high sell wall might mean that many traders don’t think an asset will rise above a certain price, whereas a low sell wall might mean the asset’s price is anticipated to rise.

As a supplier an individual may put a sell order for 10 apples at $1.10 each which would be plotted as a dot on the right side. Gordon Scott has been an active investor and technical analyst or 20+ years. The vertical axes on both sides of the chart represent the total volume of an asset pair being bought and sold.

Why Understanding A Depth Chart Is Important?

Back to the screenshot — in this specific example, there is a BUY wall @ 9,000 sat. In order to drive the price lower than that, someone (or all sellers combined) would have to sell ONIONs worth more than 3.56 BTC. Mind you though — these buy and sell walls can instantly show up and disappear. Being able to view the depth of market information for a particular security in real-time allows traders to profit from short-term price volatility.

how to read market depth chart

In this example, there are buyers willing to buy at a price up to $5,996/BTC and sellers willing to sell at a price down to $5,983/BTC. On the right (red) side you have the highest sell order (price) that sellers hope the asset will become so they can sell it for a large profit. Seeing this trend, the trader might determine that Stock A is going higher. Armed with that knowledge, the trader can decide whether this is the right time to jump in and buy or sell the stock. However, if a stock is not particularly liquid, it doesn’t trade as constantly. Purchasing a block of shares may have a noticeable impact on the stock’s price.

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