What is the DOM, Bid and Ask?

Perhaps one of the most confusing components on many cryptocurrency exchanges charts is the image above. You’ve got these blobs of green and red that converge in the middle and drop off. And then we’ve got these two other rows or columns with red and green and different prices all over the placed and all sorts of number flying all over the place — it becomes a little confusing. Heck, I’ve seen people say it doesn’t mean anything and that it is just filler for the chart. But that couldn’t be further from the truth.

Depth of Market

You might have heard of something called the DOM or Market Depth — they are very much the same thing. The DOM is generally a name given to something that looks like this:

The image above is a DOM of the BTCUSD crypto pair. But most often we see Market Depth represented in cryptocurrencies like this:

But that still doesn’t help. In fact, I think the color schemes that are used actually confuse the hell out of people. Take the image above: the bottom parts are colored green and called the ‘Bid’ while the red-colored top half is called the ‘Ask’. Let’s differentiate these terms:

Bid = the price a buyer is willing to pay. People want to buy at this price (limit buy orders).

Ask = the price a seller is willing to sell. People want to sell at this price (limit sell orders, or profit targets).

Now, this is the part that gets confusing for people. Why would something be colored green if it means prices need to drop and why is it colored red if it means prices move up? I believe you need to think of it differently, like this:

Bid = Selling Volume

Ask = Buying Volume

If you are currently long on something, you want to see the prices move up — you want to see prices of the Ask to move higher. If you are short, you want to see the Bid price move lower. But we can get an idea of where we may find resistance or support as well. Look at the image below:

Just from visually inspecting the image, you can see that there are more Sell Orders above in the Ask (Red) than there are Buy Orders below in the Bids (Green). If we see a DOM like this we need to ask ourselves: which way is easiest for the market to move? The answer is lower — it is easier for prices to drop than it is for them to rise. Why? Look at the number of people wanting to sell higher at the Ask. Think of it as a bunch of people who bought at or below the Bid and now have profit targets set to sell at the Ask.

If I was looking at this live, I would be cautious about buying because it looks like prices will have difficulty moving higher. But that means others feel the same way. This is where the psychology of the DOM comes into play. If many people want to sell at the same price range, it discourages buyers from coming. So people exit those sell limit orders, creating a thinner Ask profile. But if the Bid price begins to drop, people who were hoping to sell higher may think that the market is going to drop too far and they may end up losing profit — or having to take a loss! But there is one very bullish/bearish event you need to look for:

Watch for bids and asks being ‘eaten’. An example of this would be on the same image above: if price keeps moving higher and the Ask columns continue to get smaller and smaller, that means there are a huge number of buyers coming into the market, more than there are sellers. This generates a powerful buying frenzy and can quickly run over and fill all of the remaining sell orders. The inverse is true for selling/shorting. I would encourage anyone to spend some time looking at this type of analysis right next to their candlestick charts. You will be surprised how precise your own buy and sell entries can be.