Market depth is a real-time measure of limit order volume. It shows the exchange’s ability to execute large orders without affecting the price. It is also an indicator that measures the liquidity of an exchange.
The greater the market depth, the more liquid the exchange is and the less affected by large orders. Greater market depth also reduces the risk of price manipulation. If the market depth is small, it will be more susceptible to price volatility.
Market depth can also be used to gauge market sentiment, whether buy or sell sentiment is more dominant. It is visualized as a “market depth chart,” where the chart represents the existing order book. If it turns out that buy orders are more dominant, then the market is considered bullish. On the contrary, the market is considered bearish if sell orders are more dominant. By reading the market depth chart, traders can get information about market conditions.