Thread by @stocktalk_in

📕 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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