crypto strategy

What are Crypto Order Books and how do they work?

An order book provides data for analyzing cryptocurrency trading. With it, you can spot important information that can improve your trading decisions. For example, through the order book, you can understand market trends, supply and demand areas, and good entry positions, among other things, by seeing what other traders are doing.


What is an order book?

An order book lists buy and sell orders that investors have placed for a crypto asset on a centralized exchange. The numbers chart contains information about buy and sell orders, the prices at which they were executed and the total amounts involved. It is constantly updated throughout the day so you can get real-time insights useful for active trading decision-making.

You can think of it as a behind-the-scenes picture of market demand and supply activity that can be used to identify support and resistance, order balance or imbalance, and other activity you can exploit.

How does an order book work?

Each time a limit order is placed, it appears in the order book until it is executed. The order book lists the amount traders are willing to pay for buy and sell orders, the amount, which is the quantity they wish to trade, and the total amount involved.

a screenshot of the btcusdt order book on Binance

The order book has a buy side and a sell side, revealing the necessary information. Orders from sellers are usually red, while orders from buyers are green. In some order books, the terms “Bid” and “Ask” are used instead of “Buy” and “Sell”. Buyers are those who bid, while sellers ask for a specific price to sell their positions.

Market Depth Chart

The order book also comes with a visual representation in the form of a line chart to better represent market information. The market depth chart visualizes the supply and demand of a cryptocurrency at different prices and in real time. It shows the weight of buy and sell limit orders in an order book. Just like the order book, it also has a buy side and a sell side.

The horizontal axis of the market depth chart shows the prices at which buy and sell orders are placed, while the vertical axis shows the number of orders placed at each price level. You can hover over the depth chart to see how many buy and sell orders are placed at a specific price.

a graph showing the depth of the btcusdt market

The market depth chart makes it easy to detect buy and sell walls. A buy wall is formed by large buy orders at a particular price, while large sell orders form the sell walls. The midpoint of the chart contains the current cryptocurrency market price and market spreadi.e. the difference between the highest bid price and the lowest ask price.

The term “market depth” refers to the ability of a market to sustain large orders without changing the price significantly. The more pending buy and sell orders placed, the greater the depth of the order book. If the green side is higher than red, there is more buying interest below the current market price, while a higher red shows more selling interest.

A large buy wall shows that traders believe the price is unlikely to fall below the specific price level. A large order volume may be enough to push the price up if the trades are executed. When sellers see buy walls, they typically exit their positions when price approaches the buy wall, increasing the chances of a trade reversal. The opposite is true for sell walls. Sellers do not believe that the price will rise above a certain level, and they try to pull the price back down.

How order books are used in trading

If the order book or market depth chart shows more buyers than sellers, an uptrend may be about to begin and the price may begin to rise. Conversely, having more sellers could mean that a downtrend is imminent.

If a specific price level has a lot of buyers, such a price level is usually considered a strong support level. On the other hand, if there are more sellers at a given price, we speak of a level of price resistance. Combining this with price action and all the indicators you use could help you make more informed decisions.

How reliable is an order book in trading?

The reliability of the order book depends on your ability to interpret and integrate the information it provides into your strategy. It may take time and practice to fully understand how it works.

Order books can help you know the supply and demand pressures of a crypto asset, with which you can determine whether the market is bullish or bearish. The book shows you buy and sell orders at different prices and volumes, and you can use it to find out if a token price will rise or fall in the short term. Traders can also use information from an order book to determine the best price to buy an asset.

Order book limits

Crypto market manipulators can deceive traders by providing false clues in the order book. These clues can affect market sentiment and cause traders to make bad decisions. The possibility of manipulation is one of the reasons why expert traders do not consider the order book as the best choice to determine their trading decisions.

an image showing bitcoin and ethereum tokens and a chart of trading volume

Some trading details are hidden in the order book. Thus, we can say that it does not offer complete transparency. Think about jobs performed in a dark pool. These transactions are very large and can affect the direction of the market. As a result, they are best negotiated privately. Commercial information is only available after the transaction has been completed. With this, it can be concluded that the order book is not an accurate representation of market demand and supply.

Order book trends change very quickly, especially in markets with large trading volumes. As such, long-term traders may not find it useful.

Finally, the order book trade matching method may not be the best for illiquid markets because it is difficult to find matching orders. As a result, traders may have to wait a long time for orders to be executed, and when they are, it may be at an unfavorable price due to the large spreads. A decentralized matching engine works best because it executes orders without relying on external liquidity.

Practice before incorporating trading books into your strategy

Knowing how to read and interpret information from an order book can help you understand short-term events and trends in a crypto market. However, reading and correctly interpreting the information in the book takes patience and practice.

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