What is the Exchange market
DOM (Depth of Market, Level 2, Order Book) – is the current list of buy and sell orders for a particular trading instrument, executed in the form of a special table. It specifies prices, which are currently offered by participants of the exchange market. The market depth shows the current balance between buyers and sellers, and is a useful tool for traders and investors.
The stock market is essentially an auction, where sellers and buyers participate. For example, you decide to buy 10 shares at a certain price, which you set yourself. Your bid falls into the Exchange glass, and if it is close to the current market price, then the seller will be found quickly. If the market wants to buy at a higher price, you will have to wait until the sellers close all the bids above, and then it will be your turn.
What does the Exchange glass look like?
The Market Watch is divided into two columns: the left column shows buyers’ prices and volumes (number of lots), while the right column shows sellers’ prices and volumes. The price difference between the nearest buy and sell orders shows the current spread.
The visual representation of the Market Watch depends on the trading platform used and may differ, but the general parameters are the same. As a rule, sell orders are displayed at the top, while buy orders are displayed at the bottom. The cup cannot contain all requests from buyers and sellers in the online mode. It displays only the bids closest to the current market price.
They, in turn, form the so-called “market depth”. For example, if you use a market depth of 20*20, the Depth of Market will display the 20 closest buy prices and the 20 best sell prices. It is quite common for brokers to display the quotes in the Cup. It can be changed individually using the settings in the trading terminals.
Types of stock exchange orders
Major types of exchange orders:
- Market – is an order for immediate sale or purchase of an asset at the current market price without specifying it. The priority of these orders is mandatory execution: if there is sufficient liquidity in the market, the position will be immediately opened (or closed).
- Limit orders are orders to sell or buy an asset at a specified price. Limit order excludes possibility of transaction at the less favorable price, however it will be executed only if there is an available limit price (or the best), otherwise the order will not be executed.
- Only limit orders are displayed in the Exchange Depth of Market. Bids at market price are not visible here, they are executed instantly at current quotes.
It is quite simple to place limit orders in the Quotation window. To do this, select the desired price (for sale or for purchase), specify the volume and activate the order. You can use “one-click” trading, when required volume is pre-set and a deal is executed immediately with a mouse click on the necessary quote. You can view the executed deals in the Ribbon of Deals (Deal Journal, Level 1).
Bids can be of two types according to their influence on the quotes of financial assets:
- Minor – small orders that separately have no influence on price movement. They can have a limited effect on quotations in case they are grouped in a narrow price range.
- Significant – high volume orders that can strongly influence price movements and attract increased attention of traders and investors.
Another distinctive feature is the iceberg orders that contain visible and concealed parts. For example, 100 lots have been placed at a certain price that is the visible part of the order. At the moment when the requested 100 lots are sold, a new identical sell order appears immediately.
This will continue until the seller has bought out the entire hidden volume, for example 5,000 lots. These bids can be placed under certain conditions but not always. You can track the execution of iceberg bids using the Ribbon of deals.
How the Market Watch is useful for traders and investors
Many experienced investors and traders use the Market Watch as an additional tool for analysis. For example, having found significant support and resistance levels on the price chart, you can try to assess the probability of a price breakout or rebound from them with the help of the Depth of Market.
To do this, look at the number and volume of orders near the price level. If there is a large accumulation of large bids at a significant level, the probability of a pullback from it is high. If, on the contrary, there are few bids and the volume is low, the probability of breakdown of the level is higher.
You can also focus on the bids, assessing them by their “activity”:
- Aggressive – orders that actively move the quotes. They appear suddenly and push the price in a certain direction. Their appearance can be used to assess the direction of the current price impulse.
- Passive – bids that protect a certain price level. These are large orders that stand at a specific price and do not move. Traders often use them to limit risks by hiding protective Stop Loss orders behind them.
The Exchange Market Maker in combination with the Ribbon of deals is a useful tool for traders and investors. The ability to analyze the information presented in it can help to assess the market situation in details. It can be used to confirm the presence of strong support and resistance levels as well as to determine the direction of the current price impulse.