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One of the first points to make about the DOM is that it represents limit orders that are in the market already. It does not show stop orders and it does not show the intention of traders who have not placed their orders in the market. In the example we can see that there is an order to buy 14 lots at 5230, but this order could be cancelled before the market gets to 5230, so it is not a certainty. Assuming this order does hold and the market moves down to be 5230 bid, it could be that a trader is waiting for the market to be 5230 bid to enter a market order to sell 50 lots. If we knew that we would have a different view of this 14-lot bid. When we see the 14-lot bid in the DOM we assume that it will offer some support, but if we had all the information we might view it differently. The 74 main point is that the information available in the DOM is only part of the picture and it is not certain. Because of these factors I do not use the DOM as a means of gauging the strength and weakness of the market. It is not simply a matter of adding up all the contracts that are bid and comparing it to the number of contract for offer. It is useful, however for deciding where to place an order. If you were long at say 5232 and you were looking for a place to put a protective stop, hiding it behind a big order is a good idea. So putting your sell stop at 5229.5 is better than at 4230. To trigger your stop at 5229.5 the 14 contracts at 5230 will have to be sold first. Similarly if you were short from 5232, you might want to put your protective buy stop at 5237.5, as there is a bulk of orders between 5235 and 5237 to work through before your stop can be triggered. |
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