The depth of market (DOM) is a tool that shows the distribution of buy and sell orders at different prices for a given currency pair or security. Essentially, it can be used to gauge the depth of order liquidity in that currency pair or security.
Although 100% true volume data for the Forex market cannot be accessed because it’s a decentralized marketplace, data from a large liquidity provider or a pool of liquidity providers can be just as good most of the time.
With depth of market data, clients get access to volume and liquidity information and can use it to their advantage. They have an insight into the sentiment of the market with the quantities of volume available at different prices which can often indicate the potential market direction in the future.
Depth of market provides the ability to see the order of flow through the perspective of the brokerage.
In essence, a larger quantity of buy orders around a certain price level compared to the sell orders can mean that there is stronger buying pressure in that market which is bullish for the underlying asset or currency pair.
Conversely, a large number of sell orders higher than the current market price can mean that the market will first rally up to that level before it collapses when it hits the specific price level where the large volume of orders rests.
Classical technical trading patterns can be executed with a higher degree of confidence with the help of the depth of market tool because a support area confirmed by a high number of buy orders is a much stronger signal that it will hold than a support area not helped by a lot of buyers.
A must-have tool for scalpers and short term traders
Depth of market is used by Forex traders in order to help them determine the best levels to enter or exit a position.
Many traders utilize the depth of market data in order to make a profit by buying and selling securities or currencies at key levels where there is a cluster of orders and then hold it for a very short time before selling it for a small profit.
These kinds of strategies are considered scalping in Forex trading. Scalpers and short term traders usually prefer to use depth of market data along with technical analysis trading tools in order to confirm their trading signals.
A great tool for trading larger volume
The depth of Market data is very valuable for traders with larger capital who are trading larger quantities of volume on each trade. The ability to see at what price a large number of orders is concentrated allows them to execute their trades in the most cost-efficient way possible without getting a lot requotes and slippage.
The depth of market can indicate the exact volume (number of lots in Forex) that can be bought or sold of a particular currency pair without causing any large moves in the price.
As long as the balance of buy and sell orders stays in equilibrium the price will not move much, but as soon as there is an imbalance on either side, then large price gyrations start to occur.
Finally, having this kind of information available is certainly an advantage for any Forex trader in both executing their trades and judging future market direction.
However, not all Forex brokers offer the depth of market tool. Normally, it is ECN brokers that can provide order flow information alongside with several other advantages, hence it’s recommended for traders to always choose an ECN Forex broker over a market maker.