How to read the DOM

Learning to read the DOM is less about memorizing patterns and more about watching how orders behave over time.

The goal of this post is not to give you a strategy, but to help you understand what is happening as the numbers change. We will walk through a few basic order-by-order examples using interactive replays.

Below we have a DOM and a Tape for CL - crude oil futures contract. Press Play, it will automatically pause at each step.

We see a market buy order for 15 contracts enter the market. On the tape, this prints as a single aggressive buy of size 15 (the tape shows orders in their original quantity). On the DOM, that order does not fill at a single price. Instead, it trades against the resting offers across several price levels. At each level, available liquidity is consumed until the entire order is filled. In this case, there were 7, 2, 2, and 4 contracts available at successive price levels. The buy order traded through those offers, exhausting the available liquidity and pushing price higher as a result.

Press play again. Bid limits fill the vacuum left behind by the order. Its normal for market makers to fill behind an aggressive order.

Let's look at another example - we will look at 2 more buy orders of 15. Press play.

Same orders, different outcomes

This time the price didn't move, all 15 contracts got filled at the same price despite there only being 7 visible contracts. The buy hit an iceberg order - an order that allows traders and investors to hide volume behind a visible order.

Press play again - this time the market order trades all the visible liquidity (as before). Except the price hasn't changed - we can still buy at 64.44. Instead of buyers filling the vacuum left by the order, sellers did. And in doing so, sellers were able to transact some volume on the way back down.

These are both examples of absorption. We have sellers who are hiding.

So we just witnessed in total 3 different orders of 15 interacting with liquidity. As time progresses, its important to note how participants behavior changes as volume changes.

* New orders accumulate on top of each other in the buys/sells column.

Lets look at some of these orders in the wild

Orders in the wild

Press play. We have some similar behavior occur. On our tape, we see an order of 142.

* You can change the Tape's filter by adjusting the number in the top right - change it to 1 to see all the trades.

We can see at a glance that there were/are roughly 24 limits at each price, yet we have 49 and 86 contracts trade at their respective price. The exact numbers aren't that important, we are simply recognizing the presence of buyers beyond the visible limits.

In this particular instance, yes we have hidden buyers - but does that make this bullish? Not quite. In the greater context, if you scroll down you see 315 and 214 bids at 57.50 and 57.49, the market has been in a downward trend and are reaching lows. Then notice the time bottom left - this is Regular Trading Hours Open. This volume is to be expected.

In this position, buyers are vulnerable, we do not expect there to be any considerable market/aggressive buys. If we do see a reversal, it will be only if sellers keep hitting resistance.

Trading market open on the DOM can be fast paced but can often be very rewarding. We have larger than average volume enterying the market, this can result in big directional moves.