Market Depth, Liquidity and VWAP Explained
Have you ever looked at a body of water and wondered just how deep it is? We bet you’ve even had that little voice in your head go “Jump! You can FLY!”. We’re joking of course, on a more serious note, the idea of a pool’s depth also translates into trading by something called Market Depth. Basically it’s a concept that shows how much liquidity is available at each market price.
This is a very useful tool when you want to enter into and exit out of large trades. This allows you to know the prices at which your lots will be filled.
On the MT5 platform, only the Top of the Book (TOB) prices are shown, which are basically the best prices available at the moment and therefore are available for a limited volume. However, don’t worry at all, as at CryptoAltrum, we’ve enabled the Full Market Depth on our MT5 platform. What does that mean for you as a trader? It means that you can see exactly which prices are available, according to the available volume.
So the question is, how do you activate this Market Depth? Excellent Question! Here’s how.
Once you have opened your CryptoAltum MT5 platform, head over to the Charts menu button. You’ll find the first option is Depth of Market. Click on it and a dialog box will appear showing you the market depth for the instrument that you’ve selected at the current moment. Alternatively you can simply press on Alt + B and that would give you the same result.
Once you have clicked on Depth of Market, the following table box will appear showing all the prices and what the volume is at each price.
This shows you what is the volume at each price, for example, there are 45.98 lots available at the price of 11349.27, or 7.91 lots at price 11416.22. This would give you an indication of where the volume is congested, but doesn’t show you what kind of positions there are, just the number of positions.
VWAP, or Volume Weighted Average Price, is an average price for a position you enter that considers multiple levels of volume. Like we’ve mentioned above, there are volumes attached to each price level, so if you were to exceed the volume at a certain price the volume of the next price would be taken into consideration. It might not be clear so let’s take an example to clarify things. Anything is much clearer with an example.
However, before we start you need to know a certain formula, don’t worry this isn’t Math Class, no need to memorize, just understand it for the sake of the example.
Then next thing we need to do is to look at the Market Depth Book that we showed you earlier. Now, let’s say that we want to trade 15 Lots of BTCUSD at the current market price, which is 11376.93 in this case. What would happen is that 1.29 lots of the 15 would be filled at 11376.93 and the rest filled with higher prices until 15 lots have been completed.
Now it would be time to apply the above VWAP formula to understand what is the actual price you’re paying for your 15 lots.
So you are paying the following:
- 1.29 * 11376.93 = 14,676.2397
- 3.06 * 11379.35 = 34,820.811
- 2.64 * 11382.51 = 30,049.8264
- 5.90 * 11385.26 = 67,173.034
- 2.11 * 11389.80 = 24,032.478
Adding those up would give you 170,752.3891, then you go ahead and divide that number by the total trade volume which is 15, and your VWAP is 11,383.49. This means that your average price for the 15 lots that you wanted is $11,383.49 which is $6.56 higher than the current market price.
Now you understand why there is a higher price when you decide to enter or exit a trade with large volume.
No matter what your crypto-related question is, feel free to reach out to your CryptoAltum Account Manager or our outstanding Customer Care Team. Your personal and dedicated Account Manager is on hand ready to help you with any questions. If you don’t have a CryptoAltum trading account yet, get one here. You’ll get your very own Account Manager.
In our new series you can learn all about different trading strategies. First up, Scalping!