Determining Forex Market Depth

By: Charley Warady

Many traders, particularly new Forex traders, want to know if they are going to be able to get into or out of a trade; therefore they often inquire about Forex market depth. It seems, on the surface, to be a simple matter. Under normal situations in any other market, the number of existing orders that haven't been executed would be easy to calculate and be made available.

This is not necessarily true when it comes to Forex. To determine Forex market depth, there are many intangibles to take into account. Determining this number would undoubtedly help even the most experienced trader, particularly when you're trading the “less popular” pairs.

Where it is

To truly determine Forex market depth, the trader truly needs to be doing business with an ECN broker. That's the only way he's going to get a true sense of what's out there. The ECN broker sends all orders out into the marketplace with banks, financial institutions, and other Forex brokers. It's a centralized location and therefore the information is available.

This doesn't really help the smaller retail Forex trader. If you're trading small, or even mini trades, you won't be using an ECN Forex broker. Ironically, it's the smaller retail Forex broker that could most benefit by knowing the Forex market depth.

Where it isn't

Most retail Forex brokers don't offer the statistics needed to determine Forex market depth. It's not that the broker is necessarily holding back any information. The answer is actually in the nature of the business and the market itself.

The Forex market is a decentralized place, it has no fixed centralized exchange where all data could be gathered. Thus, it is impossible to gauge the true market depth in currency trading. In most cases, the broker is the market and is on the other side of the trade, which is yet another reason why the average Forex trader should stick with the popular pairs.

What to do

Although it is difficult to determine Forex market depth, there are still many avenues that can be taken in replacement of this information. Trading range is still the best way to proceed when market depth isn't available. And the most important thing to consider is trading the Forex pairs that are most active.

Another thing to consider is in which market you're trading. The Asian market is the least active, whereas the American market is going to offer the most liquidity. It's true that when considering placing an order you want to know the odds of your order getting hit. However, when you're dealing with most Forex brokers, particularly the most popular ones, the liquidity of the market isn't an issue. The broker is the other side of the trade.

Exploring the Forex market depth is a nice tool to have, but it is certainly not a necessity. Not if you stick to what works. Leave it to the ECN Forex trader, because for now it's an issue you need not worry about.