Market Depth - Importance when buying/selling

[MattyJ]

First off, I apologise if this has been covered elsewhere; I had a brief look but couldn't see this specific question answered.

How much emphasis do you/should you be placing on the market depth of a stock when buying and selling? For example, is it usually best practice to buy a stock when it has more buyers & volume (i.e. more buyers price is likely to rise), and sell a stock when it has more sellers & volume? Basically, is the market depth an accurate representation of the supply and demand for any given stock? Keeping in mind I trade on Comsec so can only see the top 10 for each side.

I am aware that you should be buying stock when it is cheap, and sell when it is expensive. If you are placing too much emphasis on market depth, would this classify you as a "follower"?

Maybe if you wait until "the tide turns" after a downward/upward trend for example, would this be a valid strategy? e.g. At the moment Telstra has about 3x the amount of buyers than sellers (volume) and has been in a strong upward trend. If this shifts to even buyers/sellers, would that be a good time to sell?

Of course this should only be one of many factors considered. To refine my original question, how much weight should be placed on market depth as one of the factors considered when buying or selling a stock?

 

[skc]

First off, I apologise if this has been covered elsewhere; I had a brief look but couldn't see this specific question answered.

How much emphasis do you/should you be placing on the market depth of a stock when buying and selling? For example, is it usually best practice to buy a stock when it has more buyers & volume (i.e. more buyers price is likely to rise), and sell a stock when it has more sellers & volume? Basically, is the market depth an accurate representation of the supply and demand for any given stock? Keeping in mind I trade on Comsec so can only see the top 10 for each side.

I am aware that you should be buying stock when it is cheap, and sell when it is expensive. If you are placing too much emphasis on market depth, would this classify you as a "follower"?

Maybe if you wait until "the tide turns" after a downward/upward trend for example, would this be a valid strategy? e.g. At the moment Telstra has about 3x the amount of buyers than sellers (volume) and has been in a strong upward trend. If this shifts to even buyers/sellers, would that be a good time to sell?

Of course this should only be one of many factors considered. To refine my original question, how much weight should be placed on market depth as one of the factors considered when buying or selling a stock?

It depends a lot on what you are trying to achieve.

If you are a short term trader trying to steal 2-3 pips from the market as a day trade, market depth reading is probably very important.

If you are a long term fundamental investor who wants to hold the stock for the next 10 years, a few cents here and there are unlikely to matter.

If you are somewhere in between, the answer is somewhere in between.

There was a thread here somewhere, where a person extract data from Comsec total buys vs total sells and identify trading candidates. There were some examples that you might be able to learn from (sorry can't remember the title of the thread!).

From my experience, the balance of the market depth for some of the major stocks are reasonably telling... but the balance can also change on a dime quickly. Also keep in mind that a lot of buyers/sellers don't show their hand. The quickest moves always happen when traders keep hitting the bid/ask (i.e. buy/sell at market) rather than waiting in the queue. You'd never see those orders in the market depth.

If you are interested in exploring market depth dynamics, you can get a trial with Spark which has some pretty advanced function displaying market depth. It can also replay market depth changes on past trading days.

 

[So_Cynical]

It depends a lot on what you are trying to achieve.

If you are a short term trader trying to steal 2-3 pips from the market as a day trade, market depth reading is probably very important.

If you are a long term fundamental investor who wants to hold the stock for the next 10 years, a few cents here and there are unlikely to matter.

If you are somewhere in between, the answer is somewhere in between.

Great answer.

That's as good as its gona get Matty.

 

[Starcraftmazter]

One of the first things I learned quickly is to never trust the market depth, it's a load of crap. Stupid wankers trying to manipulate everyone.

Just look at any ASX8 stock just before market open and immediately after that stock begins trading - literally thousands of shares worth of buy and sell orders disappear instantaneously without ever having been traded.


Apart from that, I have seen countless times some really big buy order standing 2 ticks or so away from the sp, and it will disappear instantly if it becomes 1 tick away.

 

[MattyJ]

It depends a lot on what you are trying to achieve.

If you are a short term trader trying to steal 2-3 pips from the market as a day trade, market depth reading is probably very important.

If you are a long term fundamental investor who wants to hold the stock for the next 10 years, a few cents here and there are unlikely to matter.

If you are somewhere in between, the answer is somewhere in between.

I'm probably looking at a more long term view due to my age and inexperience with trading (i.e. investor more so than trader). However, if one of my investments is clearly heading towards a down trend, ideally I would be able to identify this when it is occurring and convert it to cash, then reinvest once it's at the bottom of the trend.

There was a thread here somewhere, where a person extract data from Comsec total buys vs total sells and identify trading candidates. There were some examples that you might be able to learn from (sorry can't remember the title of the thread!).

I'll see if I can find it.

From my experience, the balance of the market depth for some of the major stocks are reasonably telling... but the balance can also change on a dime quickly. Also keep in mind that a lot of buyers/sellers don't show their hand. The quickest moves always happen when traders keep hitting the bid/ask (i.e. buy/sell at market) rather than waiting in the queue. You'd never see those orders in the market depth.

I'll keep this in mind.

If you are interested in exploring market depth dynamics, you can get a trial with Spark which has some pretty advanced function displaying market depth. It can also replay market depth changes on past trading days.

Probably a bit too "in depth" for me

One of the first things I learned quickly is to never trust the market depth, it's a load of crap. Stupid wankers trying to manipulate everyone.

Just look at any ASX8 stock just before market open and immediately after that stock begins trading - literally thousands of shares worth of buy and sell orders disappear instantaneously without ever having been traded.


Apart from that, I have seen countless times some really big buy order standing 2 ticks or so away from the sp, and it will disappear instantly if it becomes 1 tick away.

I read somewhere about people placing fake orders. Isn't there any kind of regulation to prevent this? Is it even illegal?

Great answer.

Agreed.

Thanks for the responses, much appreciated.

 

[Starcraftmazter]

I read somewhere about people placing fake orders. Isn't there any kind of regulation to prevent this? Is it even illegal?

Evidently not. If it was, I cannot imagine how it can possibly be regulated.

 

[burglar]

Your shares are only worth what someone is willing to pay!
Market depth is a reasonable tool to gauge what that price might be.

 

[CanOz]

Your shares are only worth what someone is willing to pay!
Market depth is a reasonable tool to gauge what that price might be.

The level II market depth on the US markets is very important. You can identify held bids and offers as well as hunt orders. Many traders look for these clues to anticipate the next move in the share price. If you have good eyes, quick reflexes and a knack for reading this tape, you can make a decent living trading US stocks.

CanOz

 

[joea]

First off, I apologise if this has been covered elsewhere; I had a brief look but couldn't see this specific question answered.
Of course this should only be one of many factors considered. To refine my original question, how much weight should be placed on market depth as one of the factors considered when buying or selling a stock?

MattyJ
Market Depth is a point in time.
Some platforms have MD analysis, to show a bit of a profile on what is happening with the "buys and sell" at that point in time.
In one of my attempts to gain an "edge", I purchased Steidlmayer's Market Profile, Trading with Market Profile. Second Edition.
As the book is "beyond me", you are welcome to it free of charge.
If you read a review, it is what you may need, however I am more orientated to Wyckoff and associated understanding of VSA.

A thread exist titled "Steidlmayer/Distribution Analysis with a couple of posts.

PM me if you are interested in the book.
joea

 

[Trembling Hand]

One of the first things I learned quickly is to never trust the market depth, it's a load of crap. Stupid wankers trying to manipulate everyone.

Just look at any ASX8 stock just before market open and immediately after that stock begins trading - literally thousands of shares worth of buy and sell orders disappear instantaneously without ever having been traded.

LOL your lack of understanding for market mechanics continues to show no end and no end in amusement to boot.

You may want to look at opening and closing auction matching before you start flogging your great new trading software to the masses. They may ask you a question out of the 101 basics handbook.

Too funny.

 

[Gringotts Bank]

skc might be referring to Life Choices "Half-baked trading scheme".

I also did a thread called "Some MD stats"

The conclusion I drew was that if a stock moves significantly on high volume, a heap of bids appear (after the fact). Not really surprising.

If you want to see when a stock's MD changes suddenly from seller heavy to buyer heavy, that could be handy. This can be done with Turbo Trader, or Spark (as already mentioned).

 

[Joules MM1]

One of the first things I learned quickly is to never trust the market depth,

ah......you need to go external to be recognised for your obvious and misunderstood talents

http://www.vankartrading.com/job-opportunity-junior-broker/