Orders are the means by which traders interact with an exchange. An order book is a useful instrument for traders and financial analysts as it provides valuable and instant pricing information at a glance. In this blog, we’ll explain how to read an order book and how it can help you in trading.
What is an order book?
The term order book refers to a digital list of buy and sell orders on an exchange. Every coin traded on an exchange will have a separate order book. All exchanges maintain order books that will have a list of orders placed for assets such as stocks, bonds, and cryptos. They are organized by price level and list the number of coins that could be traded at every price point.
How does an order book work?
The primary function of every exchange is to match compatible buyers with sellers at every price point, and an order book executes that task. Buyers post ‘bids’ on the exchange for specific coins while sellers post ‘asks’. Trades on both ends are executed when a match is found. Order books, which are dynamic in nature, keep track of these evolving bids and asks in real time.
How to read an order book
A typical order book consists of 3 main components: buy orders, sell orders, and trading history.
Bid vs. Ask
Buy orders include all ‘bids,’ which consist of a price and quantity the buyer wishes to purchase. Sell orders include the price at which sellers are willing to let go of their coins and the sale amount. Essentially, a bid is the buy price, while an ask is the selling price.
Parts of the order book
Buy and sell orders
Buy orders follow descending order, which means the highest bid is at the top of the order book. Sell orders are in ascending order, so you will find the lowest sell price at the top. The trade is executed if the highest buy price matches the lowest sell.
Trading history and other parts
Besides ask and bid prices, order books also typically contain order histories that help determine the overall direction of market prices. Some books may also contain market, stop-loss, limit, and trailing-stop orders.
How to read a market depth chart
Market depth is a measure of a coin’s market liquidity. A market depth chart illustrates the liquidity of a coin in the market. In other words, this is the crypto market’s ability to execute large orders without significantly impacting the coin price. Although it may not always be accurate, market depth is closely related to trading volumes. The higher the trading volumes for a coin, the better the depth is.
A depth chart also helps traders understand a trading pair’s overall supply and demand while offering easily deciphered cues to the market situation. The buy and sell ‘walls’ of a typical market depth chart, for instance, can indicate the price levels at which a coin’s demand (or supply) dramatically increases. These walls represent a large number of buy or sell orders placed below a given price point. The higher the wall, the deeper the market is.
Market depth charts also help determine the direction of price movements. For instance, a low market depth at specific prices could make moving prices easier for whales and large funds with virtually unlimited resources. Conversely, higher market depth could make prices harder to move, indicating some stability in the short term.
The top of the order book
The top of the order book is where you’ll find the highest bid—the largest amount someone’s willing to pay for the security/coin at any given time. You would also find the lowest ask prices at the top—-the lowest amount someone is willing to settle for a coin.
Order book liquidity
Traders who deal with huge volumes of crypto often worry if their orders will be filled without moving the price much. If prices increase progressively as they continue buying, averages and costs go up. Traders then have to make that much more profit to stay in the green.
Liquidity measures how easily these trades can be executed without moving prices. The more liquid an asset is, the higher its demand and supply. Market depth and order books both measure liquidity in their own ways.
Support and resistance
Market depth charts also serve as support and resistance indicators for crypto. For instance, a big buy wall in the chart indicates that many people are willing to buy that coin at the specified price. When prices reach that point, they will stay put as many buy orders keep prices afloat. Therefore, traders might be persuaded to sell an asset or buy more at a large-enough buy wall.
The same works for a sell wall. Since there are a lot of sellers at a particular price point in a high sell wall, it acts as a resistance to further price appreciation. A large number of sellers prevent prices from going higher and act as an actual wall, preventing the market from moving upwards.
Conclusion
To sum up, both these tools enable market participants to make informed decisions in real-time. Dynamic order books and visually dense market charts help traders gauge sentiment and market spread before executing trades to maximize their returns on capital.
FAQs
How do you read a market order book?
Buy orders are usually ranked in descending order, which means the highest bid is located at the top of the order book. On the other hand, sell orders are ranked in ascending order, so the lowest sell price is located at the top. At any point, if the highest buy price matches the cheapest sell, the trade is executed.
How do you measure order depth?
Order depth can be gauged using a market depth chart. Among other components, market depth charts contain buy and sell ‘walls’ which indicate where support and resistance lie and where liquidity increases sharply.
What is the purpose of maintaining an order book?
The fundamental job of every exchange is to match compatible buyers with sellers at every price point. An order book does just that. Buyers post ‘bids’ on the exchange for specific coins, while sellers post ‘asks. Trades on both ends are executed when a match is found. Order books keep track of these evolving bids and asks in real-time.
What is an order book?
The term order book refers to a list of buy and sell orders on an exchange. Every coin will have a separate order book. They are organized by price level and list the number of coins that could be traded at every price point.
