Market depth refers to the market’s ability to sustain large orders without significantly affecting the price of an asset. It shows the supply and demand dynamics through the order book. The main components of market depth include bid prices, ask prices, order sizes, and liquidity levels.

The bid price represents the highest price buyers are willing to pay for an asset, while the ask price is the lowest price sellers are prepared to accept. Together, these create the bid-ask spread, which indicates the cost of trading. A narrower spread usually suggests better liquidity and higher efficiency in the market.

Another component is the order size, which shows how many units traders are willing to buy or sell at a given price. Large order sizes at different price levels provide a clearer picture of support and resistance areas.

Liquidity plays a central role in market depth. Markets with high liquidity can absorb big trades with little price movement, whereas thin markets often experience volatility when large orders are placed.

Finally, the cumulative volume at different price levels helps traders anticipate potential price movements. By analysing these components together, traders can gauge the strength of market participants, identify imbalances, and make more informed trading decisions.