Also known as the DOM indicator, the Depth Of Market indicator attempts to tell us where most of the trading action is taking place.
But is it any good at its job? This is what we really want to know.
Episode 43’s question is from Uri,
“Do you like the DOM indicator for discovering where the Big Banks are probably going to make their next move?”
— Uri, from Tel Aviv, Israel
I can’t believe I had let this one slip through the cracks. The DOM indicator is actually included in your MT4 (if you know where to look). and Mr self-proclaimed King of Indicators (me) had never heard of it.
It’s a highly searched topic, yet the videos and site that explain it are complete crap for the most part.
Let’s try and change that.
The What
If you go to your MT4 and hit either ALT+B or right click and scroll down, you will open up the Depth Of Market indicator for whichever currency pair you are trading.
What it attempts to do, is show you the levels at which trading activity is happening more heavily than other areas.
Could this be important?
Well, we know the Big Banks use information similar to this to find out where to take price. What if we had a way to become privy to this information too?
Therein lies the appeal, and why this topic gets an incredible 9900 searches a month on Google!*
Comedian Dom Irerra, creator of the DOM Indicator.
The How
Brokers know where their clients’ orders are sitting at all times. It is their data after all.
Problem is, they can’t do anything about this, so may as well pass this knowledge onto the trader.
So the Depth of Market indicator shows you the levels, then shows you the volume going on at those levels.
WOOHOO!! We’re trading like the Big Banks now!!
Or are we?
Dominic Monaghan, inventor of the DOM Indicator
The Huh?
If you haven’t figured it out by now, this indicator cannot really help you.
First off, if you have a dealing desk broker, as most people in the United States do for example, the information it gives you is limited to just the levels, not the volume.
And the levels look like this:
Taken straight from my MT4
Seriously, this is all you ever get from Oanda.
Soooooo, there are some levels. Not levels which have any significance whatsoever, just every possible price in a certain range on the EUR/USD.
Thanks DOM Indicator!! Super helpful!!
Now, some traders do use this tool as a simpler version to enter trades, I get that.
But this isn’t what we’re after.
Can this help us decide where to enter the market ourselves?
The answer is an obvious no. It’s just a box with sequential prices on it. Zero help whatsoever.
But Wait….
Now on ECN brokers, you may be able to get more data here. I have no idea why this is, but it will sometimes show you the volume at these levels.
If you look at the actual definition of the Depth of Market Indicator from Investopedia, this is how it will describe it.
Good! So we have more info now (some of us, at least).
Taken from “The FX View”. Volumes shown on the left hand side.
Now we have something a bit more usable. Similar to what stock traders have with Level II.
We now know where the volume is!!
A huge victory for the little guy!
C’mon now.
Did you really think it was this easy?
Fatal Flaw
So you know which levels have a lot of volume, hooray!
Do you know which way these traders are going?
Do you know the percentages of long to short traders right now?
Do you know how any of this data is going to affect this percentage, and how the banks will react?
No? You have none of this information?
Well then you officially have nothing.
Unless I’m missing something absolutely vital here (and I always feel like I am with the DOM), this thing is useless when it comes to helping us figure out where price is going to go.
It may have some utility as an easier way for people to enter trades, but when we talk about indicators here at No Nonsense Forex, we want things that help us determine direction, volume, or money management.
The Depth of Market Indicator does none of these things.
Hard pass.
Dom Perignon, inventor and proprietor of the DOM Indicator.
Conclusion
There’s no reason to try and trade like the Big Banks anyway, we’ve been over this, stop trying.
Build a system, trade it, and let it do its job. Simple.
I cannot blame anyone for being curious and searching, and trying these things out.
But allow me to save you some time on this one.
There’s just not enough there for us to use.
— VP
*Numbers are based on the Keywords Everywhere plugin for Google Chrome.