Market Depth and Its Function in Stock Trading

Market depth is a graph of the accumulated volume of demand and supply at each price level.

Market depth charts can provide a quick, real-time view of the buying and selling pressure of a stock.

What are the Functions?

1. Looking at Market Sentiment

The market depth chart provides information on whether the market is dominated by buyers or sellers. If there are more buy queues, the market is potentially bullish. Conversely, if there are more selling queues, the market is potentially bearish. Meanwhile, balanced queues indicate a stable market with high liquidity.

2. Monitoring Trading Activity

A large order or withdrawal at a certain price will significantly change the shape of the market depth chart. Investors can analyze whether the change really represents investor interest or is a stock spoofing scheme (manipulation in the form of placing large orders without the intention of executing them).

The formation of buy walls and sell walls on market depth charts identifies the presence of large orders at certain price levels.

3. Detecting Support & Resistance Levels

Buy walls and sell walls can also be helpful tools in estimating support and resistance levels. A price where the bid volume is much higher than other prices is likely to be the support level, while a price where the offer volume is higher will be the resistance level.

As an important note, investors need to be wary of unusual volume increases in order to avoid false breakouts.

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Disclaimer: The content is made for educational purposes, not a recommendation to buy or sell a particular stock. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (OJK).