What are cryptocurrency order books and how do they work?

An order book provides data for cryptocurrency trading analysis. Through it, you can find 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 the order book?

An order book lists buy and sell orders that investors have placed for a crypto asset on a centralized exchange. The table of numbers contains information about the orders of buyers and sellers, 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 information useful for active trading decision-making.

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

Whenever a limit order is placed, it appears in the order book until it is executed. The order book shows how much traders are willing to pay for buy and sell orders, the amount, which is the amount they want to trade, and the total amount involved.

The order book has a buy side and a sell side, revealing the necessary information. Orders from sellers are usually colored red, while orders from buyers are colored green. In some order books, the terms “Bid” and “Ask” are used instead of “Buy” and “Sell”. Buyers are the ones making bids, while sellers are looking 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. 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 have been placed at a specific price.

a chart showing the depth of the btcusdt market

The market depth chart makes it easy to spot buying and selling walls. A buy wall is formed by large buy orders at a certain price, while large sell orders form sell walls. The center point of the chart contains the current cryptocurrency market price and the market spread ie. the difference between the highest purchase price and the lowest sale price.

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

A large buying wall indicates that traders believe the price is unlikely to fall below the specified price level. A large volume of orders can be enough to increase the price if the transactions are executed. When sellers see buy walls, they usually exit their positions when the price approaches the buy wall, increasing the chances of a trade reversal. The opposite is true for sales walls. Sellers do not believe that the price will go above a certain level and try to push the price back.

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

If a specific price level has many buyers, such a price level is usually considered a strong support level. On the other hand, if there are more sellers at a certain price, it is known as the price resistance level. Combining this with the price action and indicators you use will allow you to make more informed decisions.

How reliable is the order book in trading?

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

The order book can help you know the supply and demand pressures of a crypto asset, through 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 this to know whether a stock’s price will go up or down in the short term. Traders can also use information in the order book to determine the best price to buy an asset.

Order book borders

Cryptocurrency market manipulators can deceive traders by providing false data in the order book. This data 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 trading volume chart.

Some trade details are hidden in the order book. Therefore it can be said that it does not offer full transparency. Consider transactions made in a dark pool. These transactions are very large and can affect the direction of the market. Therefore, it is best to negotiate them privately. Transaction information is only available after the transaction has occurred. It can therefore be concluded that the order book is not an accurate representation of market supply and demand.

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

Practice before integrating 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 interpreting the information in the notebook correctly requires patience and practice.

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