HOW MARKET DEPTH WORKS:

A lot of traders (especially intraday) look at a stock’s market depth table to determine the upcoming moves and accordingly take their buy / sell decisions.

Here's how market depth data can sometimes be misleading and lead to losses.

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Here's how most traders read the market depth:

If there are higher number of buyers (bids) means the stock is in demand and will go up.

If there are higher number of sellers (offers) means the stock is in supply and will go down.

But that is not how it works.

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Let’s say, for a given stock the market depth shows as below (1 qty):

- Total Buyers: 50000
- Total Sellers: 2000

Many will interpret this as a high demand stock & expect it to go up.

But still sometimes the stock rapidly goes down despite more buyers.

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This is because, it takes just a single big SELL order (from big players like institutions, HNIs, etc.) that can absorb the buying pressure.

In above case, if a big player puts in a 100000 sell order at market rate, all the buying pressure gets absorbed in one go.

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And now suddenly you see a drastic change in the market depth. Suddenly, buyers are very less and sellers are many more.

Retailers who had put in small BUY orders got their orders eaten up and the stock starts to fall down further.

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So, never ever rely on just the market depth data to take your buy / sell decision.

Most important of all, always think from the high level perspective.

Try to think of how the big players in the market would think. It will give you a much clearer picture.

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