Market depth refers to the volume of buy and sell orders at different price levels for a particular asset. It shows how much liquidity is available and how large trades can affect the market price. Deep markets with high order volume and small spreads are considered more stable, while shallow markets can be volatile. Traders use Level 2 data or depth-of-market (DOM) tools to gauge depth and plan large trades with minimal price disruption. Understanding market depth helps in timing entries and exits, especially in volatile environments or while executing large volume orders.
Example:
The order book displays multiple layers of bid and ask prices beyond the best quote.
