Depth of market determines support resistance

This method will apply to traders trading stocks (US) or futures contracts because these markets can only see the depth of the market - the depth of market (DOM).

We can follow the order flow chart on the DOM to see where the bulls and sellers are coming from to make the market move. These buyers and sellers can form important zones of support and resistance.

Take a look at the DOM table below:

Can you see at what price point could become a potentially strong resistance?

The answer is 126’310 and 126’315.

And the reason is that the matched volume at these levels is much higher than the rest of the prices.

This means that upon hitting this zone, the bulls will have difficulty pushing the price even higher. That is, when the price hits this zone, the price will be under selling pressure and we can take that as an advantage for the sell orders. So we have a potential resistance zone that's easy to spot.

The way of dealing with resistance support uses the DOM table

Step 1: Determine that the market already has a clear trend with overwhelming buying or selling pressure over the other side.

For example, if the market is trending up, you will find that buying pressure increases with an accepted offer price very easily.

Step 2: Identify potential prices for entry into a position.

Find prices in the DOM table of high volume to enter position because the possibility of price reversal at those levels is high.

Step 3: Wait for the market to create an adjustment wave and wait for the order flow table to confirm an allowed position.

For example, if you are going to BUY, you will want to see the Bid column being absorbed or the selling pressure slowing down a bit.

Step 4: Once the order flow table confirms the trend of the transaction setup, then enter the order.

For example, if you want to go BUY and see the strength of the Bid column, you can go BUY.

For example:

On the left, the market is rising. The table on the right shows the level 110 and 105 are two potential areas for BUY.

We will wait for the market to correct these two levels to buy. In the DOM table above, we see 105 Bid / 110 Offer. But we haven't entered a buy order yet.

We'll wait for order flow to confirm that 105 is a good buy.

To buy, you would want to see strength in the Bid column, or weakness in the selling force in the Bid column when the market moves to 105 or 110.

In the DOM table above, we see 105 being touched and 581 lots traded according to the Bid column.

At this point, although 105 bids are less than 110 offers, it has yet to move into an offer. It is a sign that there are no big hands selling down to make the market drop lower.

Notice that the bid column below 105 is quite thick. That is more significant than the market will hold around this price level.

Soon after, 105 turned into Offer but the volume was small. At this time, 100 Bids are not matched yet and are halted at 100 Bid and 105 Offer. Then someone chooses Offer at 105 with 66 lots.

This is a signal to buy and buy right at Offer 105.

A few seconds later, a large buyer scans the entire offer at 110 and it instantly becomes a huge bid.

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