Depth of Market (DOM): Understanding What It Is and How to Use - TRADEPRO Academy TM (2024)

The Depth of Market, commonly referred to as the DOM is one of the most integral parts, if not the most integral part to trading futures. This is what differentiates the amateurs from the pros in the market. There are two main tool to successful futures trading and one of them is the DOM, the other the volume profile. The DOM is so important because it is a full view image of all the futures market participants entering and exiting the market. No matter what kind of trader you are, retail or institutional, your order will be seen on this apparatus.

What Is the Depth of Market (Dom)?

The DOM is a chart interface that allows traders to see the orders that are accumulating at each price level on a futures instrument like the S&P500 futures, Nasdaq, Oil, Gold, etc. The DOM lays out all of the market participants in both limit order (resting orders waiting to participate in the market) and market orders. Among other customizable settings.

The DOM allows traders to see who is in control of the market and at what price they are in control. This liquidity tool shows all. Unlike stocks, there is a centralized exchange for futures, meaning there are no off-market orders in the futures market, which is something common you see in stocks (dark pool orders).

The Main Depth of Market Columns

This is what a DOM looks like for the S&P 500. There are a lot of different columns and realistically your DOM should resemble something of the sort. The columns from left to right are as follows:

  1. The volume profile (orders since the start of the session)
  2. Volume profile orders (since the start of the opening of the platform)
  3. Price of the asset
  4. Buy column (traders place limits to buy, or get out of shorts)
  5. The market SELL column (a bid hit is a market sell)
  6. The market BUY column (an offer lifted is a market buy)
  7. The bid volume profile (cumulative bids that have traded during the session. Red because these denote market to sell)
  8. The ask volume profile (cumulative offers that have traded during the session. Blue because these are market buys)

Columns that differ from these don’t hold too much use, in fact, having two volume profiles isn’t the best use of space.

In terms of importance and what each column can tell you. The most important columns are the two middle columns that are sandwiched between the bid and ask columns. These are called “recent bid trades” and “recent ask trades” or “current traded quantity”.

These two columns help traders identify where there is market buying and market selling and to what extent. The bid and ask columns to hold some importance, however to a lesser degree. They are intent on market participation rather than actually traded contracts. Markets move based on traded contracts, rather than on intent to trade. There is a slight need to look for inventory, however, it comes second to traded quantity.

The volume profile is really useful as well, to identify where there are clusters of larger contracts traded versus thinner contracts traded. The volume profile on the DOM works as if it were any other volume profile. You can read up more on it here.

As well as watch this Youtube video on the volume profile and futures.

How to Use Depth of Market (DOM)

The key point of this article, and ideally what you were most interested in learning, is how do you actually use the DOM to produce trades and trade ideas. Or simply put, how to read the DOM?

We’ve established the columns, and which are important so how do we put this together?

Now traders can use the DOM alone to trade, but it is more favorable to have multiple factors in your trading strategy along with the DOM to come with higher probability trades. Such as the volume profile.

The most evident use of the DOM is reloading the bid/offer to create buy or sell pressure seen in the middle columns. (recent trade quantity). For example, take the image below into consideration. The recent trade columns are most commonly read as “who has more to give”. If there are consistently larger numbers on the blue side (we are lifting offers and the market is going bid or higher). If there are consistently larger numbers on the red side (we are hitting the bid and the market is going to offer, or lower). So we want to see who wins the battle at these areas.

Typically at a predetermined level, you want to watch for the sellers to capitulate (red side) even though they may have larger quantities traded, then the buyers to come in with even larger quantities and push above that sell that tried to come into the market.

In the example below we can see that the last 4-5 columns were reoffered pretty hard, between 60-150 contracts traded down there. Then we see between 80-140 traded for the long side, followed by more active buyers as the price went up. This is what you want to notice when getting into the long at a level. The inverse for shorts.

Another tool is the bid and asks volume profile that we have in front of us. We would like to see buyers defending the buy and sellers defending the sell. If there is an imbalance where there are a lot of sellers stuck near a low, like 1042 vs 107 at 57 on the DOM (ES DOM). We have SELLERS that are stuck and cannot make prices go lower. Should price overtake this level, we have more buy-side to come in.

The final piece of the puzzle is less important but it is actually what is ON the bid and ask side of the DOM. Where we have our limit orders and resting order. Old orders that have been there all day are stale, but new orders become magnets.

If you want to learn more about this, check out the Futures page at TRADEPRO Academy.

Useful Platforms

The platforms one can use are as follows:

  1. Sierra Chart
  2. Jigsaw

Other than these, we have found there are few platforms that offer the DOM capabilities as needed.

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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.

Depth of Market (DOM): Understanding What It Is and How to Use - TRADEPRO Academy TM (2024)
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